“[T]he most likely path is still USD strength as part of the natural consequence of the US following policies that work to generate excess demand, high interest rates and also a stronger currency, at the same time as other countries are cutting interest rates and downgrading inflation fears relative to growth ones,” UBS said in a recent note.
1. Interest rate convergence with other low-yielding currencies like the Japanese yen and Swiss franc is expected to increase the euro’s attraction as a funding currency.
2. The political outlook for the eurozone remains unhelpful, with potential risks stemming from German elections.
3.Concerns about U.S. tariffs pose a threat to the euro area economy.
UBS forecasts the EUR/USD to end 2025 at 0.990.
The yen’s outlook is tied to expectations of Bank of Japan policy shifts. UBS expects the BOJ will deliver 75 basis point rate hikes, compared with current market positioning of 50bps, potentially supporting the yen.
But the path to BOJ rate hikes isn’t straightforward. The central bank hiked rates in December and may not be keen to hike again at a time when “US policy is still unknown and could be potentially dangerous for Japan,” UBS said, flagging the risk of U.S. tariffs.
UBS is forecasting USD/JPY at 150 by the end of 2025, down from current levels around 158.
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