UBS On-Air: Paul Donovan Daily Audio 'Domestic demand drivers'
At a Glance
The desk anticipates that the ongoing uncertainty surrounding the nomination process for the next Federal Reserve Chair will lead to an increase in volatility within major currency pairs, particularly EUR/USD, GBP/USD, and USD/JPY. Per the full note from UBS, the potential candidates for the role may lack the perceived independence from political pressures that past chairs had, impacting market confidence in future rate decisions. Current pricing reflects a complex landscape where trade policies and domestic demand are in flux, especially as the US grapples with potential import tax increases that could disrupt international trade. The desk highlights that the latest market consensus sees EUR/USD hovering around 1.1500, with targets for December 2026 varying significantly across institutions, amplifying the importance of upcoming economic data and Fed decisions.
Key Takeaways
- 01Ongoing Fed nomination uncertainty could elevate volatility in FX markets.
- 02Potential tariffs outlined in US discussions may complicate trade and domestic demand.
- 03Current EUR/USD pricing around 1.1500 with broad institutional target variance underscores market hesitance.
- 04Consensus points towards a bullish tilt in our coverage, especially from firms like UBS and Deutschebank.
Full Analysis
What the desk is arguing
The desk posits that the nominees for the Federal Reserve's next governor, likely lacking political independence, could result in a hesitation among market participants regarding US monetary policy moving forward. The environment is further complicated by ongoing discussions about trade taxes and their potential economic implications, which add layers of uncertainty to domestic demand conditions, a crucial component for economic growth.
Data driven by political dynamics, like the TBD tariff structures in the US, coupled with the E.U.'s anticipated retail sales figures, could shift market sentiment. This backdrop might lead to increased volatility in EUR/USD, GBP/USD, and USD/JPY as traders navigate the implications of these developments.
Where it sits in our coverage
Current market pricing for EUR/USD sits at 1.1500, while the median consensus range for Dec-26 is significantly broad, with UBS projecting a target of 1.2000. Other notable firm targets for EUR/USD by Dec-26 include: - hsbc: 1.1800 - deutschebank: 1.2500 - goldman: 1.2000
The desk's bullish stance aligns with UBS's target at the high end of the spectrum, indicating a belief that the EUR/USD pair will rally despite prevailing headwinds.
How other firms see it
Among aligned views, firms like hsbc and deutschebank support a more optimistic outlook on EUR/USD, reinforcing the sentiment that potential Fed nominee characteristics may drive bullish trends. Conversely, firms like citi and mufg appear more cautious, suggesting a tempered view on EUR/USD moving forward.
Wider economic indicators, such as inflation metrics and central bank commentary from both the US Fed and the ECB, will be instrumental in shaping expectations for not just EUR/USD but also GBP/USD and USD/JPY trajectories as they respond to monetary policy shifts.
Market Implications
Traders should closely monitor the 1.1500 level for EUR/USD; a decisive break above could signal a bullish trend aligning with UBS's projections. Furthermore, potential upcoming economic data releases regarding US retail sales and ECB commentary could influence market positioning ahead.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
From the original
There is apparently a shortlist of four for the position of next governor of the Federal Reserve, and prospective nominee to be chair of the board of governors. US Treasury Secretary Bessent is not on the short-list. The question is whether anyone nominated can possibly shake off
Related speeches
4 itemsUBS On-Air: Paul Donovan Daily Audio 'Independence Day'
The desk interprets the potential announcement of a new Federal Reserve Chair by President Trump as a significant influencing factor for the USD. Per the full note from UBS, markets could face volatility as the Senate's approval remains a crucial hurdle, notably in light of past opposition during Trump's first term. This uncertainty is compounded by a fear that an appointment perceived as politically motivated could undermine the Fed's independence, thereby impacting monetary policy effectiveness. Market participants might anticipate heightened fluctuations as August and September EIA and GDP data begin to shape the economic landscape ahead of the decision, particularly with the last quarter's data expected to underscore the US economy's foundational strength prior to recent government interventions.
Why we’ve changed our Fed and ECB calls
The desk anticipates a synchronized rate hike from both the Federal Reserve and the European Central Bank in December, following recent hawkish signals from both institutions. Per the full note from Commerzbank, this shift is driven by concerns over a supply-side shock from rising energy prices amidst lingering inflationary pressures, much like the landscape seen in 2022. With the expectation for the US 10-year yield to exceed 5% by year-end, traders should brace for volatility in USD-denominated pairs that may arise from these developments. The desk observes that both central banks now appear poised to act in tandem, diverging from traditional trends in which the Fed typically leads. With this context established, the latest consensus targets for EUR/USD and GBP/USD remain in focus as market players adjust their positions accordingly.
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