UBS On-Air: Paul Donovan Daily Audio 'Murky situations'
At a Glance
The desk interprets recent comments from US Treasury Secretary Bessent, who expressed confidence in Federal Reserve Chair Warsh's ability to manage inflation, potentially signaling a more hawkish stance from the Fed. This endorsement is particularly notable given Warsh's previous denial of being a "sock puppet" for President Trump, which raises questions about the independence of the Fed amidst current economic pressures (Per the full note source). While inflation is expected to decrease as tariff effects fade, the desk remains cautious about long-term price stability. The current USD strength against the EUR and JPY, along with upcoming ECB communications, may create volatility in these currency pairs.
Key Takeaways
- 01US Treasury Secretary endorses Fed Chair Warsh amid inflation management concerns.
- 02Expected inflation decline tied to waning tariff impacts and energy prices.
- 03Attention shifts to potential ECB hawkish communications influencing EUR valuation.
- 04Desk's targets align closely with consensus bullish outlook on EUR/USD.
Full Analysis
What the desk is arguing
The desk frames this as a critical juncture where Warsh's credibility and the Fed's operational independence are under scrutiny due to recent political endorsements. Although inflation figures might decrease naturally, the desk highlights potential market reactions to any further hawkish statements from the Fed.
As inflationary pressures continue to wane, particularly from tariffs and energy prices, markets could react strongly to any ECB hawkish turns as well. A crucial observation is that oil price influences on inflation, given recent geopolitical tensions, may still play a role in shaping future trajectories.
Where it sits in our coverage
For EUR/USD, our current spot is 1.1500, with a consensus target of 1.1840 by June 2026, and various firms holding differing outlooks: - ubs: Mar26 1.2000, Dec26 1.2000 - deutschebank: Mar26 1.1800, Dec26 1.2500 - citi: Mar26 1.1700, Dec26 1.2200
This desk's perspective aligns closely with ubs, which sees a bullish EUR/USD sentiment, leaning toward the upper end of the target range.
How other firms see it
Aligned firms, such as ubs and deutschebank, appear optimistic about EUR/USD in the medium-term outlook. In contrast, citi maintains a more conservative view, suggesting a weaker Euro trajectory compared to these bullish perceptions.
Of interest, the movements in USD/JPY are also relevant as they may react strongly to changes in Fed rhetoric versus BOJ policy, making it essential to monitor both currency pairs for potential spillovers.
Market Implications
Watch the EUR/USD level at 1.1500 as a pivotal point, contingent on upcoming ECB communications and any shifts in Fed sentiment. A breach could trigger significant moves in both EUR/USD and USD/JPY pairs.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | — | 1.1445 |
J.P. Morgan | — | 1.1300 |
Goldman Sachs | — | 1.2000 |
All 27 desk targets for EUR/USD
From the original
US Treasury Secretary Bessent warmly endorsed Federal Reserve Chair Warsh, describing Warsh as competent and capable of lowering inflation. Such endorsements are not unusual, but as Warsh had to deny being US President Trump’s “sock puppet” this sort of intervention might shape p
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4 itemsUBS On-Air: Paul Donovan Daily Audio 'Say more'
The desk interprets the recent hawkish tone from the Federal Reserve, as outlined by Paul Donovan from UBS, as a significant shift in the central bank's commitment to combating inflation. This firm stance may create friction between Fed Chair Warsh and the Trump administration, particularly as the Fed's own research indicates that tariffs have contributed to rising inflation in the U.S. The establishment of new committees at the Fed raises questions about the agility of future policy changes, suggesting that the hawkish rhetoric may not translate into immediate actions. Ongoing scrutiny of U.S. unemployment, detailed in the Fed's truncated communication, highlights the complexities in navigating current economic conditions. Per the full note [source], this development emphasizes the importance of understanding the nuanced implications of Fed policy amidst structural changes in the economy, which have not been seen in the last 250 years.
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The desk interprets the developments surrounding the Federal Reserve as a significant risk factor for the USD, particularly in the wake of President Trump's comments about possibly dismissing Chair Powell. Per the full note [source], the blockage of Powell's potential successor, Walsh, by Senator Tillis underscores the political entanglements that could threaten Fed independence, a sentiment echoed across markets. Evidence from ongoing FOMC deliberations suggests that Powell's continued leadership may support more aggressive rate cuts, influencing trader positioning and sentiment going forward.
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The updated commentary from UBS highlights the connectedness of bond market movements, geopolitical tension, and inflation expectations. As investors react to the ongoing war in the Middle East, there is speculation that pressure on bond yields may prompt a policy response from the U.S. administration similar to that observed during tariff negotiations. Per the full note [source], while markets are anxious about rising inflation driven by fuel and food prices, the likelihood of a meaningful policy shift remains uncertain due to the complex geopolitics involved. This context holds potential implications for currency pairs sensitive to U.S. fiscal and monetary policy shifts.
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