UBS continues to forecast further upside for EUR/USD

The euro reached UBS's September target of 1.16, driven by weaker U.S. inflation data, as market attention shifts to U.S.-EU trade negotiations ahead of the July 9 deadline. UBS anticipates slow but sufficient progress in trade talks to avoid a major dispute, while monitoring potential European fiscal spending, particularly from Germany, which could influence the euro's trajectory. Market focus is now turning to Federal Reserve communications as participants assess the path of U.S. monetary policy, with UBS forecasting further upside for the euro beyond the 1.16 level.

Analysis

The euro has achieved UBS's September target of 1.16 against the U.S. dollar, primarily driven by recent weaker-than-expected U.S. inflation data, which has lent support to the EUR/USD exchange rate. Market attention is now pivoting towards U.S.-EU trade negotiations, with a critical deadline of July 9 approaching. UBS anticipates that progress in these negotiations will be gradual but sufficient to avert a worst-case scenario, although a significant escalation in trade disputes remains a potential headwind for the euro. Concurrently, developments in European fiscal policy, particularly any stimulus announcements from Germany, are being closely watched as they could influence the euro's trajectory. While upcoming final Eurozone Consumer Price Index figures are not anticipated to materially shift the current risk balance, communications from the Federal Reserve regarding U.S. monetary policy will be a key focal point for market participants. UBS maintains a constructive outlook, forecasting further appreciation for the euro beyond the 1.16 level in the coming months, supported by the currency's recent momentum and the evolving macroeconomic landscape.

Key Decisions for Investors

• Investors should consider the implications of continued euro strength, as forecast by UBS, particularly in EUR/USD positioning, given the recent support from weaker U.S. inflation data.
• Closely monitor developments in U.S.-EU trade negotiations leading up to the July 9 deadline, as any significant deviation from UBS's base case of slow progress could introduce volatility or pressure on the euro.
• Pay attention to upcoming Federal Reserve communications for insights into U.S. monetary policy direction, and watch for potential fiscal stimulus announcements from key Eurozone economies like Germany, as these factors could significantly impact the euro's valuation.