Investing.com – UBS strategists cut their forecast for Monday as they expect the currency pair to test parity soon amid firmer US economic activity, before retreating further peak again towards the end of the year.
The stronger US dollar, bolstered by strong economic data in the US, has been increasingly weighing on the euro recently.
In contrast, the European economy remains subdued, with January's Purchasing Managers' Index (PMI) readings showing modest growth in services and continued declines in manufacturing.
“Firmer US economic activity is likely to trigger a test of EURUSD parity, before the pair moves higher again to the 1.05-1.10 range towards the end of the year,” said UBS strategists Dominic Schnider and Brian Rose in a note.
Further complicating the economic outlook, the inauguration of US President Donald Trump has brought US trade tariffs to the forefront of market considerations. UBS suggests that the likelihood of an arbitrary tariff path is low, with expectations leading to a more assertive stance, particularly against China.
Strategists said this could lead to a weaker rate, which would generally affect bullish currencies like the Euro, which could push the EUR/USD into parity with occasional low
Although many positive factors are already reflected in the current valuation of the USD, and negative factors in the EUR, UBS notes that a shift in market sentiment would require significant changes in US economic growth, policies tariffs, or increased growth in Europe. However, the way forward is expected to be complex and non-linear.
The bank also points to the possibility of US growth slowing and the European Central Bank (ECB) signaling an end to rate cuts by the end of June 2025, which ' could change the dynamic for the Euro in the second half of the year.
In terms of investment recommendations, UBS strategists advise that a fall in equities could provide opportunities to reduce over-long positions in the US dollar.
Technical support for the EUR/USD is seen around 1.00 and then 0.985, with resistance around 1.05.
Risks to the UBS forecast include an increase in Federal Reserve rates in response to strong economic activity, which could keep the EUR/USD below parity, or if US tariffs have a significant impact on European growth. and the ECB cutting rates further, possibly also maintaining the exchange rate below. equality.
Strategists also note that a more rapid reversal in the EUR/USD could occur if US GDP growth falls below 2% faster than expected, which would trigger price markets in more rate cuts and the weakening of the dollar, pushing the currency pair back in. the range 1.05-1.10.
