In its latest forex outlook, UBS maintains a bias towards a "strong euro, weak dollar" view, and expects the euro/dollar to gradually approach 1.20 in the coming months, seeking a more stable trading range around that level.
Behind the Range Trading: Balanced Positives and Negatives
UBS believes that the reason the euro/dollar has been "pinned" in a relatively narrow band for some time is the offsetting positive and negative factors from both sides of the Atlantic: Signs of recovery in Europe provide support, but growth, policy, and risk events limit the upside; in the US, the exchange rate swings between growth and interest rate differential advantages, making it difficult for the price to break through unilaterally.
UBS's Main Line: Weakening Interest Rate Advantage and Valuation Pressure Make the Dollar Less Likely to "Stay Strong"
On a more macro level, the UBS CIO mentioned that the dollar faces multiple "headwinds": overvaluation, twin deficits in fiscal and current accounts, and expectations of further rate cuts by the Federal Reserve eroding the US interest rate advantage, which could continue to put pressure on the dollar into the first half of 2026; their baseline forecast also points towards the euro/dollar rising to around 1.20.
At the same time, UBS also mentions in another view that if measured by frameworks such as purchasing power parity, the euro's long-term "fair level" is higher, which will amplify the euro's relative attractiveness during the dollar's weakening phase, but it also means that around 1.20 is more like a "temporary stable zone" rather than a straightforward surge.
Possible "Exceeded Expectations" Upside Triggers: Geopolitics and Fed Policy Path
UBS cautions that if stronger upward momentum appears, the evolution of geopolitical events, as well as the Fed's policy communication and rate cut cadence, might be key catalysts for the euro/dollar to break above its baseline target. In other words, if risk events weaken the dollar's safe-haven premium or the market more firmly prices in Fed easing, the exchange rate is more likely to "spike".
Downside Risks Remain: If US Data Remains "Hot", Watch Out for 1.15 Support
UBS also emphasizes the reverse risk: if US economic growth continues to exceed expectations, the dollar may regain support, and there is a possibility that the euro/dollar might break below the recently repeatedly tested 1.15 support line.
From a broader market perspective, some believe that for the dollar to experience a deeper, more sustained decline, new shocks or significant re-pricing of expectations are often needed; otherwise, the downward momentum may temporarily slow.
