UBS sees EUR/USD recovering as markets turn too pessimistic on Europe

Investing.com -- UBS expects the euro to recover to $1.16 by the end of 2026, saying its slide against the dollar from $1.17 to nearly $1.11 has gone further than Europe’s economy justifies.

Strategists at UBS’s Chief Investment Office said markets have become "excessively pessimistic" on Europe. The euro stood at $1.12 on that date, according to the report’s forecast table.

UBS said the decline reflected stronger U.S. economic data, worries about a possible U.S. diesel export ban, rising global bond yields and concern over France’s finances. French government bond spreads have widened significantly in recent weeks.

UBS does not expect a broader European debt crisis. It said a French budget deal is likely, possibly through Article 49.3, and that this should help narrow those spreads and support the euro.

In the United States, stronger-than-expected inflation data earlier this week first pushed Treasury yields and the dollar higher.

The move weighed heavily on the Nasdaq, yields reversed and the dollar ended the day weaker, UBS said. Markets have now almost fully priced out an October U.S. interest rate hike, which UBS said makes a sustained fall below $1.10 increasingly unlikely.

UBS said it likes buying the euro below $1.12, targeting $1.16, with an exit point just below $1.10 to limit losses. It also likes selling the downside in the pair to pick up yield, and said such strategies look attractive given increased volatility.

UBS listed support at $1.10 and $1.08, and resistance at $1.13, followed by the August highs of $1.17.

Its forecasts rise to $1.18 in March 2027 and $1.20 in June and September 2027, after the French presidential elections in April and May 2027. UBS expects energy prices to ease in 2027, with Brent oil approaching $80 a barrel next summer.

A Democratic win of both the U.S. House and Senate in midterm elections early next month would likely be a modest negative for the dollar, UBS said, adding that the risk is not reflected in market pricing. The new Senate takes office in January, making it mainly a 2027 story, it said.

Further strong U.S. data, a material worsening in European growth prospects or a significant escalation in French fiscal concerns could push the euro lower, UBS said. Softer U.S. data, fading geopolitical concerns, lower energy prices and a steadier outlook for Europe and France could speed a recovery.

Original Article

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