UBS Lifts EUR/USD Forecast to 1.20 on Fed-ECB Policy Divergence Bet

UBS has raised its price target for the EUR/USD currency pair to 1.20, up from a previous forecast of 1.17. The bank reaffirmed its bullish stance, citing an expected divergence in monetary policy between the U.S. Federal Reserve and the European Central Bank (ECB).

Revised Forecast Details

In a note to clients, UBS outlined the adjustments to its trade recommendation, which was first initiated as a long position on July 16 at the 1.1460 level. The bank's updated parameters are:

• New Price Target: 1.20 (from 1.17)
• New Stop-Loss: 1.15 (from 1.13)

These changes reflect increased confidence in the euro's potential for appreciation against the dollar.

Contrasting Central Bank Paths

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The forecast is rooted in differing economic signals from the two regions. According to UBS, recent U.S. economic data has weakened market expectations for further interest rate hikes from the Federal Reserve. In contrast, economic reports from Europe have generally been stronger than anticipated.

UBS analysts believe the Federal Reserve will hold interest rates steady at its September meeting, which they interpret as the effective end of the current tightening cycle. During the same period, the bank expects the European Central Bank will implement another rate hike, further widening the policy gap.

Market Implications

This anticipated divergence is the primary driver behind the upgraded forecast. UBS noted that the market is gradually pricing in the end of the Fed's rate-hike campaign.

Furthermore, the bank stated that continued support from fiscal easing policies in Europe provides an additional tailwind for the region's economy. UBS concluded that this combination of factors is likely to provide sustained upward momentum for the EUR/USD exchange rate.