Original Source: “UBS view across major FX for the week ahead” by Justin Low, via ForexLive on TradingView
Rewritten Article:
UBS Weekly Outlook: Broad Macro Drivers Dictating Major FX Pairs
In the latest weekly outlook from UBS, the focus remains on how macroeconomic fundamentals, central bank trajectories, and risk sentiment are poised to influence major currency pairs. Recent data and central bank communications have shaped investor expectations, especially as inflation trends evolve and monetary policies begin to diverge globally.
Below is a detailed recap and forward-looking perspective from UBS’s analysis across the primary FX pairs for the forthcoming week, including insight on the dollar, euro, yen, pound, and commodity-linked currencies.
US Dollar (USD)
UBS maintains a bullish medium-term view on the dollar, driven largely by expectations of a higher-for-longer interest rate cycle by the Federal Reserve. While core U.S. economic data has been mixed at times, persistent strength in labor markets and sticky services inflation provide underlying support for the dollar.
Key factors impacting the USD outlook:
– The market has scaled back rate cut expectations for 2024 as the Fed remains cautious about declaring victory over inflation.
– Last week’s U.S. CPI print showed moderation, particularly in shelter inflation, but services remain elevated, preventing a pivot in policy rhetoric from Fed officials.
– The recent Fed meeting confirmed that most policymakers foresee just one rate cut in 2024, compared to earlier market pricing of two or more.
– UBS believes real yields in the US remain attractive and global capital is likely to continue flowing into USD-denominated assets.
– A data-dependent Fed stance leaves room for headline-driven fluctuations, but UBS thinks dips in the USD will be bought.
Tactically, UBS expects the DXY to remain in a consolidation range but gradually edge higher in coming weeks. A break below 103.50 would be needed to weaken the constructive view.
Euro (EUR)
The ECB initiated its rate-cutting cycle with a 25 basis point reduction, becoming one of the first major central banks to ease monetary policy. However, guidance indicated a cautious approach to further cuts as core inflation has not yet fully receded. The euro’s fortunes will depend on how quickly the ECB moves compared to the Fed.
Outlook components:
– The ECB’s latest communication signaled that inflation risks remain, despite the initial cut. A majority within the Governing Council appears content with taking a meeting-by-meeting approach.
– UBS notes that economic data from the Eurozone continues to show signs of struggle, especially in Germany, constraining any bullish case for the euro.
– With the ECB beginning to ease while the Fed delays, interest rate differentials are likely to weigh on EUR/USD in the near term.
– Political uncertainties, particularly from upcoming national elections in Europe (notably France), could inject some risk premia into the euro.
From a technical standpoint, UBS sees strong resistance for EUR/USD around 1.0900 and would look to re-initiate short positions should the pair rebound toward that level. Downside potential exists towards 1.0600 over the next few weeks if U.S. data beats expectations.
British Pound (GBP)
The pound has shown relative resilience amidst hawkish rhetoric from the Bank of England, which still faces inflation dynamics that warrant caution. UBS adopts a neutral bias in the near term but continues to watch UK inflation and wage data closely for indications of policy shifts.
Key GBP insights:
– The UK labor market remains tight, with wage growth running at a level that complicates an immediate start to a cutting cycle.
– Headline CPI is expected to trend closer to target over the summer months, but services inflation is still elevated, limiting flexibility for the BoE.
– Markets have priced in a first rate cut by August or September, but UBS believes the bar to cut remains high unless wage pressures ease more materially.
– With general elections announced for early July, political considerations could play a role in FX volatility
Explore this further here: USD/JPY trading.