On Wednesday, UBS adjusted its foreign exchange forecasts for the year 2024, indicating a stronger outlook for the U.S. dollar against several major currencies. The bank has revised its end-2024 forecast for the from 1.1200 to 1.0500 and changed the end-Q2 target to 1.0500 from 1.0900, with the bottom of the Q2 trading range now set at 1.0450 compared to the previous 1.0600.
The modification of the EUR/USD forecast aligns with UBS’s tactical trades, which have recently benefited from a rise in longer-dated implied volatility and a breakout in rate differentials favoring the USD. The bank’s economists have moderated their view on the Federal Reserve’s actions, leading to the updated projections. UBS anticipates that as the European Central Bank (ECB) begins to cut rates while the Fed lags, the euro will face additional downward pressure.
Additionally, UBS has altered its end-2024 target for the USDJPY, raising it to 160.00 from 140.00. Despite Japan’s absence of intervention to slow the yen’s depreciation, UBS believes that any intervention is unlikely to have a sustained impact on suppressing unless U.S. yields decrease or the Bank of Japan (BOJ) tightens policy more aggressively. The end-Q2 target for USD/JPY remains at 155.00, acknowledging the currency pair’s recent sharp gains and the possibility of intervention-led retracements.
UBS’s forecast adjustments are not primarily driven by the recent surge in geopolitical tensions, which have at times pushed the USD beyond expected near-term levels. The bank assumes that a fade in geopolitical tensions could allow for a temporary USD pullback before its strengthening trend continues. In the case of USD/JPY, UBS maintains a stable end-Q2 view, suggesting a lower likelihood of risk-off conditions causing significant drops in U.S. rates.
InvestingPro Insights
In light of UBS’s revised foreign exchange forecasts, recent performance data for the U.S. dollar (DXY) reflects a trend that may support the bank’s outlook. Over the last week, the dollar has seen a modest uptick with a 0.9% price total return. This short-term gain extends over the past month, with the dollar achieving a 2.62% price total return, indicating a strengthening position in the currency market.
Looking at a broader time frame, the dollar’s year-to-date (YTD) performance has been noteworthy, posting a 4.7% price total return. This aligns with UBS’s anticipation of the dollar’s continued strength throughout 2024. While the six-month performance shows a slight decline of 0.1%, the one-year price total return of 3.95% and the closing price of 106.26 USD suggest a resilient dollar over the longer term.
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