UBS On-Air: Paul Donovan Daily Audio 'Say more'

What the desk is arguing

The Federal Reserve's recent meeting has conveyed a notably hawkish message, particularly concerning the fight against inflation. The desk believes this reinforces a broader narrative of potentially constrained monetary policy. Per the full note source, Donovan highlights the internal divisions within the Fed, which are increasingly leaning towards a more hawkish stance.

Supporting this viewpoint is the Fed's acknowledgment that tariffs, a central policy of the Trump administration, have notably affected inflation dynamics. Donovan notes that while the impact of future tariffs may diminish, the repercussions of previous ones remain significantly embedded in the economic fabric. The absence of any immediate policy agility following the establishment of multiple Fed committees signals an emphasis on deliberation over decisive action.

Where it sits in our coverage

Our current consensus target for the USD/EUR stands at 1.075, with a range extending from 1.04 to 1.12. Specific firm expectations include that of jpmorgan, targeting 1.10 by March 2026, contrasting with bofa's lower ambition of 1.04 within the same tenor.

This hawkish tone from the Fed aligns with the views articulated by jpmorgan, but diverges from the more dovish stance observed at bofa. The desk's positioning could be seen as favoring the upper range of the consensus, given the outlook on inflation.

How other firms see it

Firms aligned with a hawkish view include jpmorgan, which supports the idea of sustained inflation concern leading to tighter policies. In contrast, our contrary firms like bofa maintain a more cautious outlook on the Fed's trajectory.

The implications for currency will be significant, with the USD/EUR currency pair likely reacting to shifts in Fed communication—such as inflation reports and unemployment data—particularly as they pertain to the Fed's policy posture.