UBS sees euro recovering to $1.16 by year-end, says slide to $1.11 overshoots fundamentals

UBS’s view puts the euro’s recent weakness down mainly to sentiment rather than fundamentals, which would leave room for a rebound if French budget risks ease. The near removal of pricing for an October Fed hike takes away one of the dollar’s main supports, and UBS sees a sustained break below $1.10 as increasingly unlikely as a result. Energy is a key swing factor: the euro area is a large energy importer, so UBS’s expectation that Brent will approach $80 by next summer is supportive, while any escalation in the Iran war that lifts oil prices again would weigh on the currency. French bond spreads are the indicator to watch, since narrower spreads would back the recovery case and further widening would undercut it.---Earlier from analysts at the bank:UBS says neocloud sell-off does not derail AI boom, favours hyperscalers and chipmakers---UBS thinks the market has sold the euro on worry rather than evidence, and with Fed hike bets fading and a French budget deal in sight, it sees the currency’s next move as up.Summary:UBS expects EUR/USD to recover to $1.16 by the end of 2026, after a slide from $1.17 to near $1.11 that it says has gone further than Europe’s economy justifies.The bank blames stronger US data, concern over a possible US diesel export ban, rising global bond yields and worries over French public finances.It does not expect a wider European debt crisis and sees a French budget deal as likely, possibly using Article 49.3.With markets having almost fully priced out an October Fed hike, UBS sees a sustained fall below $1.10 as increasingly unlikely.UBS likes buying the euro below $1.12, targeting $1.16, with an exit just below $1.10, and sees support at $1.10 and $1.08 and resistance at $1.13 and $1.17.Its forecasts rise to $1.18 in March 2027 and $1.20 by mid-2027, after the French presidential election.UBS expects the euro to recover to $1.16 against the dollar by the end of 2026, arguing that its recent slide toward $1.11 has gone further than Europe’s economic fundamentals justify and that markets have turned too pessimistic on the region.Strategists at the bank’s Chief Investment Office said the euro’s fall from $1.17 reflected a combination of stronger US economic data, concern about a possible US ban on diesel exports, rising global bond yields and worries over French public finances. The euro was trading around $1.12 when the report was published.France has been a particular source of pressure, with the gap between French and German government bond yields widening significantly in recent weeks. UBS does not expect a broader European debt crisis, however, and sees a French budget agreement as likely. That could come through Article 49.3 of the French constitution, which allows the government to pass legislation without a parliamentary vote, at the risk of facing a no-confidence motion. A deal should help narrow spreads and support the euro, the bank said.On the US side, UBS noted that stronger-than-expected inflation data initially pushed Treasury yields and the dollar higher, but the move reversed, with yields falling back and the dollar ending the day weaker. Markets have now almost entirely priced out a US rate hike in October, which UBS said makes a sustained drop below $1.10 increasingly unlikely.The bank said it favours buying the euro below $1.12, targeting $1.16, with an exit point just below $1.10 to limit losses. It also sees value in selling downside protection in the currency pair to earn yield, given the rise in volatility. UBS identified support at $1.10 and $1.08, with resistance at $1.13 and then at August’s highs around $1.17.Further out, UBS expects the euro to reach $1.18 by March 2027 and $1.20 by June and September 2027, after France’s presidential election in April and May. The bank also expects energy prices to ease next year, with Brent crude approaching $80 a barrel by the summer.UBS flagged the US midterm elections as a risk not reflected in market pricing, saying a Democratic sweep of the House and Senate would likely be a modest negative for the dollar, though mainly a 2027 story, since the new Congress takes office in January.The main risks to its view are further strong US data, a material deterioration in European growth or a significant escalation in French fiscal concerns. Softer US data, easing geopolitical tensions, lower energy prices and a steadier outlook for France could speed up the recovery.   This article was written by Eamonn Sheridan at investinglive.com.