UBS released a report on Thursday highlighting factors contributing to continued volatility in the U.S. dollar's performance. Among the primary concerns is an ongoing Department of Justice investigation into Federal Reserve Chair Jerome Powell, creating a backdrop of uncertainty that influences investor sentiment. Alongside this legal scrutiny, UBS identifies a slowdown in disinflation efforts and a cooling in the U.S. labor market as additional pressures diminishing dollar strength.
The financial institution maintains its projection of a modestly weaker U.S. dollar through the first half of 2024, anticipating the EUR/USD pair to stabilize near the level of 1.20. This forecast reflects UBS's assessment that uncertainties surrounding leadership at the Federal Reserve further weigh on the dollar's appeal against other currencies.
Looking ahead, market participants are gearing up for critical releases of inflation data and key central bank meetings. UBS draws attention to the upcoming core Personal Consumption Expenditures (PCE) figures in the United States, particularly after a series of inconsistent economic readings in recent weeks. These statistics will provide important insights into inflation trends and monetary policy direction.
The report also highlights significant events with implications for currency markets, such as the Bank of Japan's imminent policy announcement and the prospect of elections in Japan. These developments are expected to influence USD/JPY exchange rates and may introduce further volatility amid an already uncertain environment.
In addition, UBS strategists advise taking a long position on EUR/SEK, noting that the Swedish krona appears ripe for a correction following its recent robust performance. This strategy aligns with the broader theme of a weakening U.S. dollar relative to select currencies, indicating opportunities in diverse currency pairs.