Euro Faces Uncertainty Against US Dollar Amid Political and Economic Factors

The euro (EUR) has maintained a narrow trading range against the US dollar (USD) throughout much of 2023, a trend UBS analysts expect could persist into 2024. The outlook for the EUR/USD exchange rate is heavily influenced by complex political, economic, and market dynamics, making predictions challenging. Key factors include the aftermath of the French elections, economic policies under the UK's new administration, and upcoming US economic data releases.

The recent French elections played a pivotal role in shaping the EUR/USD outlook. With a hung parliament, President Emmanuel Macron's centrist Ensemble group performed better than expected, while the far-right National Rally (RN) suffered a significant defeat. This outcome has reduced immediate risks of conflict between the next French government and the European Union, calming EUR volatility stemming from political uncertainty.

Despite these results being less disruptive than feared, uncertainty persists regarding the formation of the new government and its policy direction, potentially influencing the euro's medium-term performance. UBS maintains a longer-term target for EUR/USD at 1.0500, citing concerns that Macron's focus on domestic politics may hinder further EU integration, thus weighing on the euro's strength.

UBS outlines several scenarios that could lead to a more significant decline in EUR/USD than currently projected. These include potential policy reversals by a left-dominated French government, political stalemates impacting investor confidence, and weak economic indicators amid ongoing political uncertainty. Despite these challenges, UBS holds firm on its EUR/USD target, acknowledging potential deviations depending on future political and economic developments.