UBS expects euro to lose ground against European peers after rally

The euro has recently strengthened against the U.S. dollar and other major currencies, a trend UBS attributes to the anticipated end of the European Central Bank's easing cycle and a front-loaded German fiscal package. While UBS maintains its H2 EUR/USD forecast within a 1.15-1.20 range, it expects the euro to consolidate against the dollar and potentially lose ground against European peers. The bank advises investors to reduce dollar exposure during periods of U.S. dollar weakness and recommends selling the euro against Scandinavian currencies, while finding yield pickup strategies against the USD, CHF, and GBP unattractive.

Analysis

The euro has exhibited notable strength in recent weeks against several major currencies, including the U.S. dollar, Swedish krona, Norwegian krone, and British pound. According to analysis from UBS, this appreciation is underpinned by fundamental factors, including the anticipated conclusion of the European Central Bank's monetary easing cycle and a more front-loaded fiscal stimulus package from Germany. Despite this recent rally, UBS projects a shift in a more cautious direction. The bank forecasts a period of consolidation for the EUR/USD pair, maintaining its second-half target range of 1.15-1.20, implying limited further upside from current levels. Furthermore, UBS anticipates the euro will underperform against its European counterparts, specifically identifying opportunities to sell the euro against the Swedish krona and Norwegian krone. Conversely, the analysis highlights that yield pickup strategies involving long euro positions against the U.S. dollar, Swiss franc, and British pound are considered unattractive based on the bank's longer-term outlook.

Key Decisions for Investors

• Consider using any near-term U.S. dollar weakness as an opportunity to reduce dollar exposure or increase hedge ratios, given the EUR/USD is expected to consolidate within the 1.15-1.20 range rather than continue its upward trend.
• Evaluate short-euro positions against the Swedish krona and Norwegian krone, as UBS identifies this as a primary tactical opportunity stemming from expected euro underperformance against its Scandinavian peers.
• Investors should be cautious about implementing yield pickup strategies that are long the euro against the U.S. dollar, Swiss franc, or British pound, as these are viewed as unattractive from a risk-reward perspective.
• Reassess existing long-euro positions, recognizing that the key drivers behind its recent strength may now be fully priced in, shifting the outlook towards consolidation or depreciation.