US easing cycle to weaken dollar, help euro to rise: UBS

The Federal Reserve’s policy easing cycle that began Wednesday should weaken the US dollar and in turn, help the euro to rise, UBS strategists said in a note.

The Fed kicked off its easing cycle with a 50 basis point cut at the September meeting and is expected to continue reducing rates into 2025.

Based on the Fed’s dot plot, an additional 50 basis points of cuts are anticipated over the final two meetings of the year, aligning with their forecast of 100 basis points of total cuts for 2024. The Fed has begun easing later than most other G10 central banks and from a higher rate level.

UBS strategists expect the Fed to reduce rates “more forcefully” in the months and quarters to come compared to other G10 central banks, “thereby reducing the yield advantage of the USD, which has been a supportive factor for the currency in recent years.”

“As a result, we expect some of the current USD overvaluation to fade over the coming months and quarters,” they added.

Meanwhile, the European Central Bank (ECB) reduced its policy rate by 25 basis points at its September meeting, as widely anticipated.

Prior to the meeting, there had been speculation about the possibility of another rate cut in October, particularly given that markets expect the Fed to take action at every meeting this year. However, ECB President Lagarde dismissed this speculation, leading markets to lower the odds of an October rate cut.

UBS notes that this aligns with their forecast of a gradual approach from the ECB, involving a quarter-percent rate cut each quarter. That outlook contrasts sharply with the faster pace of easing expected from the US Fed and underlines the bank’s forecast of rising toward 1.15.

“EURUSD has entered the 1.10-1.15 range, as we expected. We see the pair grinding higher to above 1.15 in 2025,” the note states.

UBS highlights that after breaking the 1.10 resistance level in August, this has now become the new support level in September. On the upside, they identify 1.13 and 1.15 as key resistance levels to monitor going forward.