The United States dollar remains in a state of flux, facing pressure from multiple unsettled variables that UBS highlighted in a report issued on Thursday. The Swiss financial institution points out that the Department of Justice's investigation into Federal Reserve Chair Jerome Powell represents a significant element unsettling the dollar's position. Alongside this, the pace of disinflation in the U.S. economy is slowing, and signs of a weakening labor market further contribute to dollar volatility.
UBS sustains its forecast of a moderately depreciating dollar throughout the opening half of 2024. Specifically, the firm projects the euro to U.S. dollar exchange rate (EUR/USD) will trend toward the 1.20 mark. Beyond economic indicators, UBS notes that persistent ambiguity around Federal Reserve leadership adds to the downward pressure impacting the currency.
Looking ahead, the report draws attention to key upcoming events that investors will scrutinize closely. These include the forthcoming U.S. inflation data releases, particularly the core Personal Consumption Expenditures (PCE) figures, which carry added significance given recent conflicting economic reports. In addition, important hearings connected to Fed governance, including legal proceedings involving Fed Governor Lisa Cook, will be focal points for market watchers.
Internationally, the Bank of Japan's policy decision and potential electoral developments are expected to play an influential role in shaping USD/JPY exchange rate movements. UBS acknowledges that such factors may inject further volatility into the already uncertain currency markets.
Moreover, UBS strategists recommend holding a long position on the euro against the Swedish krona (EUR/SEK). This suggestion stems from observations that the Swedish krona, after a period of relative strength during the past month, might be primed for correction. The position aligns with UBS's broader expectations of continued dollar softness against selected currencies.
This detailed assessment underscores that the dollar's trajectory over the near term is closely tied to developments around Federal Reserve leadership, economic data trends, and international monetary policies. Investors and market participants are advised to monitor these areas as conditions evolve.
UBS has presented an analysis predicting a gradual decline in the U.S. dollar's value relative to the euro, with the EUR/USD exchange rate anticipated to approach 1.20 during the first half of 2024. The report attributes this outlook to several factors including an unresolved Department of Justice inquiry involving Federal Reserve Chair Jerome Powell, a deceleration in inflation reduction, and a cooling U.S. labor market. Additionally, the bank highlights ongoing uncertainty concerning Federal Reserve leadership as a pressure point on the greenback. Upcoming inflation data releases and central bank events, including a hearing for Fed Governor Lisa Cook, are identified as key upcoming factors influencing currency markets. In the context of other market movements, UBS advises a long position on EUR/SEK, expecting corrections in certain strong-performing currencies amid a weakening dollar.
Key Points
- UBS expects the EUR/USD exchange rate to approach 1.20 in the first half of 2024, signaling a softer dollar.
- Federal Reserve Chair Jerome Powell's ongoing Department of Justice investigation contributes to uncertainty weighing on the U.S. dollar.
- Key upcoming events—such as U.S. inflation data releases and central bank hearings—are likely to create further volatility in currency markets.
Risks
- Continued legal and leadership uncertainty surrounding the Federal Reserve may exacerbate dollar weaknesses, affecting financial markets sensitive to currency fluctuations.
- Mixed and potentially volatile U.S. economic data, including inflation and labor market indicators, increase unpredictability in the dollar's performance.
- International monetary policy decisions, notably by the Bank of Japan and related political developments, could introduce additional instability in currency trading, impacting cross-border capital flows.