UBS predicts that while recent market conditions have supported the US dollar, its room for further gains may be limited as upcoming economic data and central bank decisions unfold.
The bank’s insights followed a brief recovery in the US Dollar Index (DXY) after an unsuccessful attempt to fall below the 100 threshold.
According to UBS analysts, the US dollar’s recent dip has stabilized due to several factors, including heightened geopolitical tensions in the Middle East, uncertainty around the upcoming US presidential election, and weaker economic signals from Europe. These elements have temporarily supported the dollar, though UBS suggests that its weakness might be overplayed.
The bank expects the upcoming European economic indicators, such as German manufacturing orders, retail sales, and industrial production figures, to be closely watched by market participants. Meanwhile, the UK’s economic reports covering industrial production, trade, and employment could offer insights into potential shifts in the Bank of England’s monetary policy.
In the United States, attention will focus on the labor market report set to be released on Friday, along with September’s inflation numbers. UBS anticipates that US inflation data could underperform, in line with trends in other major economies. A lower inflation print would reinforce expectations for a Federal Reserve rate cut, which might exert downward pressure on the USD.
Additionally, UBS shared expectations for other major central banks. The Reserve Bank of New Zealand (RBNZ) is expected to cut rates by 50 basis points following weak business survey results, pointing to a slowing economy. This rate cut is already priced in, but the New Zealand Dollar (NZD) is projected to underperform as domestic data remains lackluster. As a result, UBS prefers the Australian Dollar (AUD) over the NZD in the near term.
Finally, UBS highlighted that while emerging market currencies have shown weakness at the start of October, some, like the Mexican peso, have demonstrated resilience due to favorable political developments. In contrast, the Israeli shekel is under pressure as the Middle East conflict escalates, with the Bank of Israel expected to maintain its current policy rate stance in its next meeting.
