UBS expects euro rebound to $1.16 by end-2026, calls drop to $1.11 overdone

From UBS's viewpoint, the euro's recent softness has been driven chiefly by market sentiment rather than underlying economic conditions, leaving scope for a bounce back if worries about France's budget subside. The near-complete disappearance of market bets on an October rate increase from the Federal Reserve has stripped away a key pillar of dollar strength, and UBS now views a durable break below $1.10 as much less probable. Energy remains a decisive variable: the euro zone is a major energy importer, so UBS's projection that Brent crude will reach around $80 by next summer supports the currency, while any uptick in oil prices stemming from a broader Iran conflict would act as a drag. French bond spreads are the metric to monitor, as a tightening of those spreads would bolster the case for a recovery, whereas additional widening would undermine it.

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Earlier commentary from bank strategists:

• UBS says neocloud sell-off does not derail AI boom, favours hyperscalers and chipmakers

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UBS contends that the market has sold the euro based on apprehension rather than concrete evidence; with expectations for a Fed rate hike receding and a French budget agreement coming into view, the bank sees the euro's next direction as higher.

Summary:

• UBS projects EUR/USD will recover to $1.16 by late 2026, after slipping from $1.17 to near $1.11, a move it considers excessive relative to Europe's economic fundamentals.
• The bank attributes the decline to robust U.S. data, fears of a potential U.S. ban on diesel exports, rising worldwide bond yields and unease over French public finances.
• It does not anticipate a European debt crisis and views a French budget deal as likely, potentially through Article 49.3.
• With markets having almost fully removed pricing for a Fed hike in October, UBS sees a sustained fall beneath $1.10 as increasingly improbable.
• UBS likes buying the euro below $1.12, aiming for $1.16, with an exit just under $1.10; it sees support at $1.10 and $1.08 and resistance at $1.13 and $1.17.
• Its forecasts rise to $1.18 in March 2027 and $1.20 by mid-2027, after the French presidential election.

UBS sees the euro climbing to $1.16 against the dollar by end-2026, arguing that the recent slide toward $1.11 has exceeded what Europe's economic conditions justify and that market sentiment has become overly negative on the region.

Strategists at the bank's Chief Investment Office said the euro's drop from $1.17 reflected a blend of stronger U.S. data, anxiety about a possible U.S. diesel export ban, rising global bond yields and fears over French public finances. The single currency was around $1.12 when the report came out.

France has been a focal point of strain, with the spread between French and German bond yields widening markedly in recent weeks. UBS does not foresee a regional debt crisis, however, and considers a French budget accord likely. Such a deal could come through Article 49.3 of the French constitution, which lets the government enact legislation without a parliamentary vote, though it risks a no‑confidence motion. An agreement would help compress spreads and underpin the euro, according to the bank.

On the U.S. front, UBS noted that stronger‑than‑expected inflation data initially lifted Treasury yields and the dollar, but the move reversed, with yields coming down and the dollar closing lower. Markets have now almost fully priced out a Federal Reserve rate increase in October, a factor that UBS says makes a sustained drop below $1.10 increasingly unlikely.

The bank stated it favours buying the euro below $1.12, targeting $1.16, with an exit point just under $1.10 to cap losses. It also sees merit in selling downside protection in the currency pair to earn yield, given the rise in volatility. UBS identified support at $1.10 and $1.08, with resistance at $1.13 and then near August's highs around $1.17.

Further out, UBS expects the euro to reach $1.18 by March 2027 and $1.20 by June and September 2027, after France's presidential election in April and May. The bank also projects energy costs will ease next year, with Brent crude moving toward $80 a barrel by the summer.

UBS flagged the U.S. midterm elections as a risk not captured in market pricing, saying that a Democratic sweep of the House and Senate would probably be a mild negative for the dollar, though mainly a 2027 story because the new Congress takes office in January.

The main risks to its outlook are further strong U.S. data, a material deterioration in European growth or a significant escalation in French fiscal worries. Softer U.S. figures, easing geopolitical tensions, lower energy prices and a steadier French outlook could speed up the recovery.