The Euro to Dollar (EUR/USD) exchange rate has weakened sharply this month, falling to around 1.1470 after trading above 1.16 earlier in June.
UBS expects EUR/USD to remain under pressure in the short term, but continues to forecast a recovery towards 1.20 over the next year as structural headwinds for the US Dollar re-emerge.
The bank notes that the Euro remains supported by the European Central Bank’s hawkish stance and commitment to price stability, even as growth risks persist across the Eurozone.
At the same time, stronger US economic data and a more hawkish Federal Reserve have helped offset the recent decline in oil prices, allowing the Dollar to remain firm.
UBS believes EUR/USD is likely to remain close to 1.15-1.16 in the near term, with risks tilted towards further weakness while markets continue to price the possibility of additional Fed tightening.
However, the bank expects the Dollar’s support to fade over time. UBS has pushed back expectations for the next Fed rate cut, but still believes US interest rates will move lower during 2027.
According to the bank, a shift towards Fed easing should take the wind out of the Dollar’s sails and allow EUR/USD to gradually move higher.
UBS forecasts EUR/USD at 1.16 by September, 1.18 by year-end and 1.20 by March and June 2027.
While ongoing US economic strength could push the pair into a 1.10-1.15 range temporarily, UBS continues to favour selling Dollar rallies and remains constructive on the Euro’s medium-term outlook.
