UBS House View Daily

Thought of the day

24.08 - Much appreciated

Positive Eurozone sentiment data gave the euro a boost on 23 August. IHS Markit’s monthly purchasing manager’s index for the Eurozone manufacturing sector rose to 57.4 from 56.0, the fastest pace of expansion since April 2011, helping push EURUSD 0.5% higher to 1.18.

But despite this evidence of the ongoing Eurozone recovery, we believe the euro will not gain much more ground against the dollar in the near term:

  • The minutes of the ECB’s July Governing Council meeting showed policymakers are concerned about the euro’s strength and the risk of overshooting, stating that, “there was presently a continuing need for steady-handed and persistent monetary policy.”
  • ECB concerns are logical, and so can be expected to be repeated if the euro appreciates further. A stronger euro, by weighing on import prices, makes it more difficult for the ECB to achieve its 2% inflation target at a time when the ECB is considering a move to taper the pace of monetary stimulus.
  • Much negative sentiment is already priced into EURUSD, with very low expectations for further Fed rate hikes or progress on the Trump policy agenda. The dollar could find near-term support if the Fed adopts a more hawkish tone, and if there is progress on a tax reform package, or if the debt ceiling is successfully raised without incident.

We expect this year’s EUR rally against USD to pause, and for range-trading to prevail in the months ahead. We keep our three and six-month EURUSD forecasts at 1.18, and our 12-month forecast at 1.20.

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