EUR/USD likely to find a peak near 1.25: UBS

UBS projects the EUR/USD to strengthen through 2026, finding a ceiling near 1.25, driven by declining U.S. trade war prominence, increased European fiscal support, and the Federal Reserve's anticipated rate cuts beginning September 2025. While Fed easing will initially pressure the dollar, policy divergence is expected to lessen by mid-2026 as global central banks approach neutral rates. Major risks to this forecast include trade policy uncertainty, energy costs, and the U.S. fiscal deficit, which UBS identifies as the greatest challenge to exchange rate stability in late 2026.

Analysis

According to a currency markets outlook from UBS, the EUR/USD exchange rate is projected to strengthen through 2026, although its upward potential is likely capped near the 1.25 level. The bank's forecast is predicated on several converging factors. A primary driver is the anticipated shift in U.S. monetary policy, with the Federal Reserve expected to commence rate cuts in September 2025 and lower the fed funds rate to 3% by April 2026, which would initially pressure the dollar. Concurrently, European fiscal support, including Germany's fiscal package and increased defense spending, is expected to gain traction and help European economic indicators narrow the performance gap with the U.S. by mid-2026. UBS also foresees the prominence of the U.S. trade war declining by mid-2026, further supporting pro-growth currencies like the euro. However, the dollar's decline is expected to be contained, as the Fed's easing cycle will be maturing by mid-2026 and other global central banks will also be approaching neutral rates, thereby reducing policy divergence as a major FX driver. UBS's specific forecast projects the pair moving towards its fair value of 1.25 next year and holds a 1.23 forecast for Q3 2026. Significant risks to this outlook remain, including trade policy uncertainty and energy costs, with the U.S. fiscal deficit cited as the most significant challenge to exchange rate stability in the latter half of 2026.

Key Decisions for Investors

• Investors with a multi-year horizon could consider positioning for EUR/USD appreciation, targeting the 1.23-1.25 range, but should note that UBS views this level as a likely peak.
• The primary catalyst, Fed rate cuts, is not expected until September 2025, suggesting that a patient, phased approach to building long euro positions may be prudent.
• Monitor the U.S. fiscal deficit, trade policy developments, and European economic data closely, as these are identified as the key variables that could alter the forecast's trajectory.
• As monetary policy divergence is expected to diminish as a driver by mid-2026, investors should increasingly focus on relative fiscal policy effectiveness and economic growth differentials between the U.S. and Europe to guide positioning.