Title: UBS Adjusts FX Strategy: Short Euro Position vs. Dollar Extended
Original Credit: This article is based on insights published by eFXdata, originally authored by their macro strategy team. Credit to the original researchers whose work was accessed via eFXdata: https://www.efxdata.com/insights/4fb782bf40b91f310db2588b72d87c94.html
In a recent strategic shift, UBS has revised its short-term currency outlook, particularly targeting the EUR/USD pair. The Swiss investment bank has added a new short EUR/USD position to its portfolio, reflecting a cautious stance on the Euro amid changing macroeconomic conditions and shifting investor sentiment. This revised position complements UBS’s existing FX strategy, which includes multiple long USD holdings and is reflective of their expectation for a stronger US dollar in the near term.
Below is a detailed breakdown of the updated UBS Forex strategy, highlighting the rationale behind the positions, key macroeconomic indicators in play, and implications for future FX movement.
Overview of UBS’s Updated FX Portfolio
UBS has made the following adjustments to its tactical FX strategy:
– Introduced a new short EUR/USD position at a spot level of 1.0906
– Maintains core USD long exposure via:
– Short AUD/USD
– Short GBP/USD
– Long USD/JPY
This strategic adjustment underlines UBS’s confidence in the relative strength of the US economy and the Federal Reserve’s hawkish policy stance, contrasted with the more dovish and uncertain outlook from the European Central Bank (ECB) and other central banks.
Reasons Behind the Short EUR/USD Position
UBS outlines several factors informing its updated bearish view on the euro:
1. Dovish ECB Outlook:
– The ECB is widely expected to begin cutting rates soon, a trajectory confirmed by recent comments from ECB policymakers.
– Market-implied expectations show a strong likelihood of multiple rate cuts by the end of 2024.
– The ECB is seen prioritizing growth support amid sluggish Eurozone activity, which contrasts with the more rate-hike-prone Federal Reserve.
2. Eurozone Economic Weakness:
– Growth stagnation across the bloc continues to challenge policymakers.
– Recent data, including Purchasing Managers’ Index (PMI) figures and industrial production numbers, suggest limited momentum heading into the second half of the year.
3. Underwhelming Fiscal Stimulus:
– While there is political momentum in the EU for revitalized fiscal support, especially through green transition projects and digital infrastructure, actual disbursement has been slow.
– Fiscal leeway remains constrained in key economies like Germany.
4. Risk of Political Uncertainty:
– Increasing political polarization ahead of the 2024 EU Parliament elections is creating headwinds for pan-European policy coordination.
– The political landscape in countries such as Italy and France may also amplify market risk premiums for the euro.
5. Widening Interest Rate Differentials:
– A dovish ECB vs. a possibly still-hawkish Federal Reserve is likely to widen rate differentials in favor of the US dollar.
– US yields remain elevated and attractive for global capital flows, especially in a yield-hungry environment.
Contrast with Federal Reserve’s Policy Path
Another key pillar supporting UBS’s USD-long bias, and specifically the short EUR/USD trade, is continuity in the Federal Reserve’s monetary tightening cycle:
– Sticky inflation in the US:
– Core PCE and CPI metrics continue to run above the Fed’s 2 percent target.
– Resilient labor market data argue against premature policy easing.
– Balanced Fed rhetoric:
– While Chair Jerome Powell has acknowledged disinflationary progress, he emphasized the need for greater confidence before the committee can ease policy.
– Rate cut probabilities have tempered in recent weeks, aligning better with UBS’s more hawkish expectations.
– Market re-alignment:
– Markets are gradually pricing out multiple Fed cuts, reducing
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