Euro-Dollar to End Year Higher

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Strategists at the investment banking division of UBS say tactical considerations suggest the Euro should end the year higher against the Dollar than at current levels.

The call comes at a time of increasing speculation that the Euro to Dollar exchange rate (EUR/USD) could be on course to fall to parity following the U.S. election result.

"While we are on board with a stronger longer-term USD bias, we still think that the balance of the year is more likely to bring choppy trading largely within the existing ranges rather than a decisive break to new dollar highs," says UBS strategist Vassili Serebriakov.

He recognises developments favour U.S. Dollar strength, but notes a sustained range breakout in global FX has proven a relatively rare occurrence over the past two years.

For this to happen, we would require a constant flow of dollar-positive headlines.

"These may be in shorter supply at least before Trump's inauguration as the recent in-fighting over the Treasury Secretary nomination has highlighted," says Serebriakov.

Furthermore, "breakevens" in fixed-income markets have played an important role in pushing U.S. nominal yields higher. However, "real rate differentials are less supportive for the dollar than nominal ones," says Serebriakov.

He adds that the market seems to have reached a limit on pricing out Fed cuts over the next 12-15 months and could swing in the opposite direction if there are any hints of weakness in US data.

"For these reasons, we still see a consolidation rather than an even higher USD in the near-term, with EURUSD ending the year at 1.07, in our view," says Serebriakov.

Meanwhile, strategists at JP Morgan say the Republican 'red sweep' at the election was the most USD-bullish potential outcome possible, and strategists maintain a 'short' Euro-Dollar recommendation.

"We maintain dollar longs in anticipation of clarity on U.S. policy soon, including the realisation of tariff risks and more fleshed out fiscal ambitions," says Patrick R Locke, an analyst at JP Morgan. "Sell EUR/USD outright."

JP Morgan thinks tariffs and Trump's plans for fiscal policy remain the main transmission channels for global FX from the U.S. elections and it now looks likely that at least the tariffs channel will be activated from the markets perspective.

"No other currency has what the dollar has: superior growth and equities, higher yield, defensive attributes. Even with no official tariff announcement, the sentiment shock in other countries could be material which should eventually strengthen USD," says JP Morgan.

The bank forecasts a multi-quarter path for EUR/USD to 1.00-1.02.