Anna 
UBS has adjusted its forecast for the EUR/USD currency pair, citing increased downside risks that could potentially push the euro below the 1.05 level against the US dollar. The decision comes amid the US economy’s demonstrated resilience to higher interest rates and escalating geopolitical tensions impacting currency markets.
Initially, UBS maintained a stance that the EUR/USD would remain within a narrow range, supported around the 1.05 mark. However, with the US economy proving more robust than expected and geopolitical concerns rising, the firm now believes that the Federal Reserve may postpone a rate cut until the end of the third quarter or later, potentially leading to a stronger US dollar.
In contrast, the European Central Bank (ECB) appears poised to commence a rate-cutting cycle as early as June, creating a divergence in central bank policies. This scenario of US exceptionalism, where the dollar benefits from a more restrictive Fed and the search for safe-haven assets continues, could weigh on the euro.
The shift in UBS’s stance is also influenced by recent movements in other currency pairs and commodities, including the decline in EURCHF and the increase in oil prices. Heightened geopolitical tensions, such as the conflict in Ukraine and Middle East tensions, further contribute to investor demand for safe-haven assets.
Despite near-term challenges, UBS maintains a positive long-term outlook for the EUR/USD pair, expecting a recovery once the Fed begins to cut rates. The firm anticipates European economic growth to rebound next year, potentially converging with US growth as demand for euros increases.
Investors should be prepared for the EUR/USD to test the lower end of the 1.05 to 1.10 range and potentially break below it, with weakened support attributed to the delayed timing of the Fed’s rate cut, now expected around September.
