The euro (EUR) has been trading within a narrow range against the US dollar (USD) for most of 2023, and UBS analysts believe this trend could continue throughout 2024. Predicting the exchange rate has been challenging due to various political, economic, and market factors at play.
The recent French elections have had a significant impact on the EUR/USD outlook. President Emmanuel Macron’s centrist Ensemble group performed well, resulting in a hung parliament. The defeat of the far-right National Rally party has reduced the risk of conflict between France and the European Union, decreasing the likelihood of EUR volatility. However, uncertainty remains regarding the new government’s policies and their potential influence on the euro.
UBS maintains a longer-term target for EUR/USD at 1.0500, citing that while the election results were not as disruptive as feared, they are not particularly favorable for the euro either. Macron’s focus on domestic politics may limit EU integration efforts, impacting the euro’s performance.
UBS outlines three scenarios that could lead to a more significant decline in EUR/USD than expected. These include the reversal of key reforms by a left-dominated French government, political stalemate causing instability, and poor economic performance due to political uncertainty affecting the euro.
Despite these challenges, UBS stands by its EUR/USD target, with potential deviations depending on future political and economic developments. The upcoming Democratic ticket shift is also expected to bring increased market volatility, but pricing in risk premia remains difficult without a clear timeline for changes.
Analysts anticipate increased implied and realized volatility in the latter half of the year due to the upcoming election, highlighting the potential for market fluctuations in the coming months.