UBS targets EUR/USD at 1.12 in 1-month and 1.14 in 3-month. They have 3 key points why they are taking this view.
"EUR/USD is the view of ours that receives the most pushback from investors, most of whom appear significantly more bearish. The pushback to our view is often that even if market pricing for the Fed and ECB is correct, the very act of the Fed hiking will be bullish for the dollar. So, even if the first hike is fully priced, and the cycle ends up being very gradual, EUR/USD can still fall sharply. We remain sceptical of this argument," UBS argues.
"First, the correlation between EUR/USD and relative central banks rates is low," UBS notes.
"Second, the most recent hiking cycle provides a significant counter argument. The Fed started hiking in June 2004, and hiked 325bp over the next 19 months, while the ECB left rates unchanged. Yet, EUR/USD actually appreciated 10% in the first six months after the Fed started hiking," UBS adds.
"Third, the argument that an expected hike can benefit the dollar partly relies on 'carry' as a driver, and although there is empirical evidence that higheryielding currencies outperform lower yielding currencies over time, we don't think EUR/USD is likely to become a carry trade. Rate differentials between the US and Euro area are not large, with the two right in the middle of the G10 pack. Even when the Fed starts hiking, the cycle is unlikely to widen the differential enough to make it much of a carry trade," UBS argues.
UBS targets EUR/USD at 1.12 in 1-month and 1.14 in 3-month.
OK, all you EUR bulls ... don't mention it, you're welcome ;-)