Euro to fall back below parity in March despite recent rally - UBS

(Alliance News) - The euro has enjoyed a rally in recent weeks, but analysts at UBS do not believe it will last.

They expect the euro-dollar currency pair, the world's most traded, to fall into a familiar pattern.

The Swiss bank said the euro often enjoys an end-of-year rally, with traders optimistic about the single currency area's prospects. However, in the early exchanges of the following year, the euro slides, UBS observed.

The euro fetched USD1.0398 on Thursday afternoon in Europe, up from USD1.0362 at the European equities close on Wednesday. Earlier on Thursday, the euro spiked to USD1.0448, its best level since early July.

The euro has spent much of the period since bouncing around the parity mark, falling as low as USD0.9532 in late-September.

In recent days, however, the single currency has stretched its legs above the USD1.00 mark.

UBS is still "cautious" about the euro's prospects, however.

"In recent years, the euro gained ground in the fourth quarter in anticipation of an improvement in the eurozone's economic situation. But in each of these cases, the dollar strengthened early in the new year as the global economy turned out differently than expected. We think this pattern could be repeated," the Swiss bank said.

The euro ended 2021 around the USD1.22 mark, but traded around USD1.17 at the conclusion of this year's third-quarter, in line with the trend outlined by UBS.

"During 2023, the US rate hike cycle is likely to end and the US dollar should weaken when the cycle draws to a close. However, we remain cautious on the euro until next March," UBS added.

Despite a November rally, UBS still expects the euro to fetch USD0.96 in March, before picking up to USD0.98 in June and USD1.00 in September. In December 2023, UBS expects the euro to fetch USD1.04, roughly where it is now.

A threat to the euro's recent strength is the Federal Reserve hiking beyond the 5% federal funds rate mark. UBS noted 5% is what is currently priced in by the markets.

"This could happen if inflation does not drop swiftly back toward the 2% target, or if wage growth remains too strong," UBS added.

A deeper-than-expected recession would also hit the euro, according to UBS. It would exacerbate the problems the European Central Bank currently grapples with - slow growth and rampant inflation.

"The risk-on sentiment that is currently supporting the euro would likely fade quickly if economic data takes a turn for the worse," UBS added.

The Swiss bank believes the long-term outlook for the euro is favourable relative to the dollar, however.

UBS added: "However, to realize this potential, the economic outlook needs to improve in the region and globally. Exports must rebound and the eurozone's current account balance, which turned negative this year due to high energy import costs, has to turn positive again."

By Eric Cunha; [email protected]

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