UBS lowers EUR/USD forecast, sees a parity test soon

Investing.com -- UBS strategists lowered their forecast for the EUR/USD on Monday as they expect the currency pair to test parity soon amid firmer US economic activity, before rebounding higher again toward year-end.

The stronger US dollar, bolstered by robust economic data in the US, has been increasingly pressuring the euro lately.

In contrast, Europe's economy remains subdued, with January Purchasing Managers' Index (PMI) readings indicating marginal growth in services and a continued contraction in manufacturing.

“Firmer US economic activity is likely to trigger a test of EURUSD parity, before the pair moves higher again into the 1.05-1.10 range toward the end of the year,” UBS strategists Dominic Schnider and Brian Rose said 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 a benign tariff trajectory is low, with expectations leaning towards a more assertive stance, particularly against China.

Strategists said this could lead to a weaker Chinese yuan , which would generally affect pro-growth currencies like the Euro, potentially driving the EUR/USD to parity with occasional dips below.

While 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, tariff policies, or an uptick in Europe's growth. However, the path forward is expected to be complex and non-linear.

The bank also points out the potential for US growth to decelerate and the European Central Bank (ECB) to signal an end to rate cuts by late June 2025, potentially shifting the dynamic in favor of the Euro in the second half of the year.

In terms of investment recommendations, UBS strategists advise that dips below parity may offer opportunities to reduce excessive 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 UBS' forecast include possible Federal Reserve rate hikes in response to robust economic activity, which could keep the EUR/USD below parity, or if US tariffs significantly impact European growth and the ECB cuts rates further, potentially also maintaining the exchange rate below parity.

Strategists also note that a quicker reversal in the EUR/USD could occur if US GDP growth falls below 2% sooner than expected, which would likely lead to markets pricing in more rate cuts and a weakening of the dollar, pushing the currency pair back into the 1.05-1.10 range.

Source: Investing.com