EUR/USD likely to find a peak near 1.25: UBS
Investing.com -- The euro is expected to strengthen against the U.S. dollar through 2026 but will likely find a ceiling near 1.25, according to UBS.
In its latest currency markets outlook note, UBS said the U.S. trade war, dominant in 2025, “is likely to lose prominence by mid-2026,” as domestic policy and midterm election dynamics shift in favor of the U.S. economy and the dollar.
At the same time, European fiscal support should gain traction and “help European economic indicators close the gap with U.S. data.”
On monetary policy, UBS expects the Federal Reserve to resume rate cuts in September 2025, lowering the fed funds rate to 3% by April 2026.
While this initially pressures the dollar, UBS said “the monetary policy outlook… will become more neutral by mid-2026” as the easing cycle approaches its end.
Meanwhile, most other central banks are also nearing neutral rates, reducing policy divergence as a driver of FX markets.
Fiscal dynamics in Europe are another factor, according to the bank.
UBS highlighted Germany’s fiscal package and European defense spending, noting that “we anticipate their full impact will be felt by mid-2026.” That should reinforce demand for pro-growth currencies such as the euro, Swedish krona, and Norwegian krone.
Balancing these forces, UBS projects EUR/USD “to move closer to its fair value—currently around 1.25—next year,” but not materially above that level.
The bank extended its 2Q26 forecast of 1.23 for EUR/USD into 3Q26 and reiterated that “EUR/USD [is] likely to find a peak near 1.25.”
UBS cautioned that risks remain, including trade policy uncertainty, energy costs, and the U.S. fiscal deficit, which it called “the greatest challenge to achieving more stable exchange rates in the latter part of 2026.”