EUR/USD: Dollar’s advantage to recede - UBS

In the forecast report for 2019, the Investment Research Team at UBS, expect the greenback to retain its strength in the near term, but they think the dollar is likely to depreciate over time as policy normalization gets underway in Europe. 

Key Quotes: 

“The USD remains overvalued thanks to marked positive short-term interest rate differentials as the Federal Reserve continues to raise interest rates. This state of affairs, along with the dispute over Italy’s budget, is likely  to prompt further near-term gains for the USD relative to the EUR.”

“Looking further ahead, we expect the Fed to near the end of its rate-hiking cycle in 2019, while the European Central Bank (ECB) will only be starting to normalize interest rates, which will cause the differentials to shrink and the dollar’s advantage to recede, in our view.”

“The support for US growth from fiscal stimulus will also wane next year, and the US twin fiscal and current account deficits are likely to start to weigh on the dollar.”

“We forecast EURUSD at 1.15 and 1.20 over six and 12 months. A key risk to our view is the US launching a large infrastructure program, which could boost growth and inflation. The dollar could also remain stronger relative to the euro if US-China trade frictions intensify in 2019, Eurozone data slows, or the ECB appoints a dovish successor to current president Mario Draghi.”