UBS On-Air: Paul Donovan Daily Audio 'No cuts for now'
At a Glance
The desk interprets recent commentary from UBS highlighting that the Federal Reserve is not in a hurry to cut interest rates amid rising uncertainty caused by trade tariffs. Per the full note, Powell's shift away from strict data dependency signals a cautious approach to the monetary policy landscape, especially as inflation is expected to rise in the short term due to tariffs. Market consensus has begun to coalesce around the idea of an inflationary environment, influencing expectations about rate cuts, albeit gently. Given the lack of impactful events on the calendar, traders should remain focused on labor market indicators for potential shifts in this narrative.
Key Takeaways
- 01Fed Chair Powell indicates no immediate rate cuts.
- 02Optimism around inflation impacts from trade tariffs.
- 03Markets expect gradual easing rather than aggressive cuts.
- 04Labor market resilience will be a critical indicator.
Full Analysis
What the desk is arguing
The desk posits that the Federal Reserve, led by Chair Powell, will adopt a conservative stance regarding interest rate cuts, primarily influenced by the inflationary pressures from tariffs as highlighted in recent communications from UBS. This narrative indicates that markets should prepare for a gradual easing cycle rather than an aggressive pivot.
Supporting this view, the expectation is for inflation to become more pronounced in the July consumer price index, suggesting that the Fed's decisions will increasingly consider future price pressures over historical data tendencies. Powell's remarks to Congress about uncertainty and insufficient labor market resilience reinforce the cautious trajectory expected in the upcoming months.
Where it sits in our coverage
Currently, the consensus target for the EUR/USD pair is set at 1.075 with a range around 1.04 to 1.12. Notable forecasts include: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
The desk’s outlook remains firmly aligned with jpmorgan’s position at the higher end of the forecast spectrum, indicating a potential appreciation in the euro as markets adjust to evolving economic signals.
How other firms see it
Several firms, including jpmorgan, are aligned with this view of moderate rate easing by the Fed, anticipating a more cautious approach amid inflation concerns. Conversely, bofa appears to take a more bearish stance, predicting less upward movement in the EUR/USD pair.
Key points of interest will include the relationship between Fed policy deliberations and currency pairs like EUR/USD, particularly as inflation metrics become more significant in shaping monetary policy decisions.
Market Implications
Traders should watch closely for the July inflation report due to its potential to influence Fed policy. The expectation around the 1.075 target range for EUR/USD indicates a cautious bullish sentiment, particularly if inflationary pressures continue as discussed.
From the original
In the US yesterday, Federal Reserve Chair Powell delivered a speech to members of the House of Representatives (most of whom are not economists). The main messages were: no rush to cut rates, and trade taxes create uncertainty. This will not surprise markets. There was a further
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The desk interprets recent comments from Federal Reserve Chair Powell as underscoring heightened uncertainty, which may delay any preemptive action from the Fed to curb inflation or unemployment. Per the full note [source], Powell's remarks suggest an ongoing reliance on lagging data, raising the prospect of policy errors as critical economic indicators become less reliable. As the Fed maintains its current stance, traders are urged to be cautious of a potential exacerbation in market volatility. This view aligns with a cautious consensus across the board as markets grapple with ambiguous signals around U.S. trade policy reforms influenced by President Trump's upcoming tariff announcements.