Investing.com — The US greenback is predicted to face rising downward stress within the coming months, regardless of a current enhance from stronger-than-anticipated financial information.
As per analysts at UBS, the outlook for the buck stays bearish, pushed by a mixture of narrowing rate of interest differentials, considerations concerning the rising US fiscal deficit, and shifting world financial insurance policies.
In gentle of those components, UBS has downgraded the US greenback to “Least Most well-liked” in its world technique, favoring currencies just like the euro, British pound, and Australian greenback as a substitute.
Thursday noticed the US greenback achieve some floor after the discharge of revised second-quarter GDP progress figures.
“In the meantime, second-quarter GDP was revised upward to a 3.0% annualized progress charge from the beforehand reported 2.8%, pushed primarily by stronger client spending,” the analysts mentioned.
This revision was largely pushed by stronger client spending, which additionally noticed an upward adjustment to a 2.9% annualized charge from the preliminary 2.3%.
This optimistic information helped the US greenback recuperate barely, however it stays below stress. The has fallen by 3% over the previous month and continues to hover close to the decrease finish of its vary since early 2023.
Regardless of this non permanent reprieve, UBS analysts preserve that the broader outlook for the greenback is detrimental, with a number of components more likely to push it decrease within the coming months.
One of many key components anticipated to weigh on the US greenback is the anticipated narrowing of rate of interest differentials.
The US Federal Reserve is more likely to proceed reducing rates of interest, with UBS projecting a complete discount of 100 foundation factors throughout the Fed’s three remaining conferences in 2024.
Whereas different central banks, together with the Swiss Nationwide Financial institution, the Financial institution of England, and the European Central Financial institution, are additionally anticipated to scale back charges, their method is more likely to be extra measured.
This slower tempo of cuts overseas might make the greenback much less engaging in comparison with different currencies.
Along with the rate of interest outlook, considerations over the US fiscal deficit are anticipated to additional erode confidence within the greenback. The Congressional Price range Workplace has projected that curiosity prices on US debt will surpass protection spending this 12 months, highlighting the rising fiscal challenges going through the nation.
Because the US presidential race intensifies, with Vice President Kamala Harris at the moment main within the polls, the fiscal deficit is more likely to turn out to be a focus of debate, probably creating extra headwinds for the greenback.
International financial coverage shifts additionally pose a problem for the US greenback. For instance, the Reserve Financial institution of Australia is predicted to take care of its present coverage stance till subsequent 12 months, which might add stress on the greenback.
In distinction, the Swiss franc is predicted to stay robust resulting from its safe-haven standing and the Swiss Nationwide Financial institution’s anticipated conclusion of its easing cycle in September.
UBS forecasts that the euro, British pound, and Australian greenback will all strengthen in opposition to the US greenback by June 2025, with at 1.16, at 1.38, and at 0.70.
The anticipated weakening of the US greenback has vital implications for world markets. Because the greenback depreciates, threat property equivalent to high quality shares are more likely to turn out to be extra engaging, notably in an atmosphere the place the Federal Reserve is reducing charges.
UBS means that buyers contemplate reallocating money into high-quality bonds, particularly these from investment-grade corporations, to make the most of the altering financial panorama.
Regardless of some indicators of weak spot within the US labor market, equivalent to an uptick in unemployment in July, the general image stays resilient. Weekly jobless claims have declined, and client spending continues to indicate power, assuaging fears of a right away recession.
UBS maintains its base case for a tender touchdown for the US economic system, supported by the anticipated charge cuts from the Fed.