UBS cautioned that the U.S. dollar could face immediate headwinds after June's consumer price index weakened, yet the firm continues to favour buying on dips because several tightening and market-supporting risks remain intact.
In a note released on Tuesday, UBS said the softer CPI print from June has taken some pressure off the greenback, even though renewed tensions in the Middle East offered limited support to the currency. The bank pointed to heavy long positioning and a reduced urgency for the Federal Reserve to tighten policy as factors that could drive consolidation for the dollar in the near term.
Despite that near-term consolidation, UBS remains constructive on accumulating dollar exposure when prices retreat. The bank outlined three principal reasons for this stance:
- Fed tightening risk has eased but not vanished - UBS says the prospect of further policy tightening by the Federal Reserve is less pressing than before, though the risk itself still exists.
- Oil prices could move higher if Middle East tensions persist - The firm notes upside risk to crude that could lend support to the dollar under certain scenarios.
- Strong U.S. earnings may boost demand for American assets - UBS suggests that robust corporate results could help revive investor appetite for dollar-denominated assets, providing another source of support.
UBS also provided tactical entry points for investors looking to build long dollar positions. The bank views rallies in EUR/USD toward 1.1550 as attractive opportunities to begin establishing positions that bet on dollar strength. Similarly, UBS identified dips in USD/CHF toward 0.80 as favourable levels at which to add dollar exposure.
These suggested entry points reflect UBS's approach of using short-term market movements as chances to build positions while acknowledging that immediate price action may be dominated by consolidation related to current positioning and a softer inflation print.
Overall, UBS's guidance is to treat recent dollar weakness as a potential buying opportunity, balancing a recognition of near-term pressure against persistent risks and catalysts that could underpin the currency on a medium-term horizon.