UBS has raised its projected EUR/CZK exchange rate to 24.5 across its forecast horizon, replacing earlier projections of 24.3, 24.3, 24.4 and 24.5. The move reflects the bank's decision to advance the timing of an expected longer-term depreciation of the Czech koruna to account for near-term risks.
The koruna has softened since the onset of the war in Iran, with UBS pointing to weaker risk sentiment and a stronger US dollar as forces that typically weigh more heavily on the koruna than on the euro. As a result, the EUR/CZK pair has been behaving more like a barometer of broader market sentiment than a reflection of domestic or euro-area fundamentals.
UBS highlighted that, apart from the war-related sentiment impact, the Czech currency still benefits from a positive yield differential and a relatively stronger growth backdrop versus the euro area. Those fundamentals provide support for the koruna, the bank said, but the currency's elevated valuation acts as a countervailing headwind.
The bank noted that in recent trading, fundamental drivers have receded into the background, with sentiment playing a dominant role. The revised forecast is therefore the bank's way of incorporating what it views as near-term pressures on the Czech currency into its outlook.
For clarity, the EUR/CZK exchange rate indicates how many Czech korunas are required to buy one euro. A higher forecast number corresponds to an expectation that the koruna will weaken against the euro over the forecast period.
This assessment centers on how geopolitical developments and shifts in market risk appetite are influencing short-term FX dynamics, even where conventional fundamentals - such as yield differentials and growth prospects - continue to exert influence in the background.