Although UBS expects the EUR/USD pair to return to the range1.18–1.20, analysts emphasize that this movement will be caused more by the weakening of the US dollar than by the strength of the euro itself.
Yield Dividend: ECB vs Bank of EnglandThe key difference in UBS's strategy lies in interest rates:
- ECB:The bank forecasts the last rate increase in September to2,5%, after which there will be a long pause.
- Bank of England (BoE):The rate will remain at the level3,75%until the end of 2026.
Even after the UBS forecast is fulfilled, the gap between the Bank of England and the ECB will be impressive1.25 percentage points. It is this “yield dividend” that makes the British pound a more attractive asset for a carry trade compared to the euro. A similar logic applies to the Norwegian krone thanks to the strict policies of the Norwegian Central Bank.
The economy grows against the odds
The bank backs up its opinion with Europe’s macroeconomic stability:
- Rising borrowing costs have not yet led to a recession.
- Energy price increases are contained, allowing eurozone GDP to grow (0.8% in 2026 and 1.2% in 2027).
- UK GDP also shows stability at1,1%annually.
However, there is a hidden risk here. Market quotes are now setmore aggressiveThan the UBS base case. The market is pricing in the probability of a BoE rate hike in November at almost70%(by +32 bp). This creates a policy premium, but leaves the pound vulnerable: if UK inflation or labor market data disappoints, a sharp revision in expectations will trigger a quick sell-off in sterling.
Technical picture
On the three-month chart, the EUR/USD pair looks more stable than during the summer sell-off. Despite the pullback from the August high1,1711, the rate remains above the rising 50-day moving average.
For GBP/EUR the situation is less clear: the July peak1,1827left behind and the current price1,1658is below both The 20-day and 50-day moving averages.
What next?
Further dynamics of the currency bloc depend on two events:
- Friday US data (NFP):A strong report could bring the dollar back to the level1,15for the euro, while weak statistics and a decrease in Treasury yields will accelerate growth towards the target1,18.
- Regulatory meetings:The ECB's decision in September will mark the end of the tightening cycle, and UK wage data will determine whether we see a return to1,17in the GBP/EUR pair or continuation of the correction.