UBS On-Air: Paul Donovan Daily Audio 'Welcome back uncertainty'
At a Glance
The desk interprets the recent commentary from UBS, emphasizing that increased trade policy uncertainty poses significant risks to currency valuations. The Supreme Court's ruling against certain IEEPA tariffs, while anticipated, sets a perplexing backdrop with President Trump's more sweeping universal tariffs, rising unexpectedly from 10% to 15%. Per the full note source, the absence of specific details about exemptions or the implications for revised trade agreements adds to the volatility that traders must navigate in the coming sessions.
Key Takeaways
- 01Increased trade policy uncertainty is leading to heightened FX market volatility.
- 02The unexpected rise of tariffs to 15% complicates trade negotiations with key partners.
- 03Market positioning may shift significantly as traders respond to evolving trade dynamics.
- 04The USD may see increased strength or weakness based on ongoing tariff developments.
Full Analysis
What the desk is arguing
The desk holds that the ongoing uncertainty surrounding US trade policy will likely lead to increased volatility in the FX markets. UBS highlighted that while some aspects of the recent tariff changes were expected, the sudden rise to a 15% universal tariff unsettles previously held assumptions about trade negotiations and their impact on currency dynamics.
Recent reports suggest that these tariffs could lead to a ripple effect, influencing currency pairs and positioning choices among traders. Industry analysts estimated that this uncertainty could contribute to potential shifts in USD sensitivity towards risk assets.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075, with a range between 1.04 and 1.12. Key firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This viewpoint aligns closely with jpmorgan, which sits near the upper bound of our established range, while bofa presents a more cautious stance, suggesting further depreciation of the USD if uncertainty lingers. The desk's positioning reflects a more bullish outlook compared to the broader consensus.
How other firms see it
Aligning with our view are firms like jpmorgan which recognize the potential for the USD to firm up short-term, whereas bofa takes a contrarian approach, indicating that the ongoing uncertainties may push USD lower.
Traders should monitor the USD/EUR pair closely, as fluctuations in trade policy will directly influence bilateral currency valuations in the context of broader economic indicators from the US and Europe.
Market Implications
Traders should watch for potential shifts in the USD/EUR towards the consensus target of 1.075. Frequent updates on tariff exemptions and their implications will be critical in shaping market sentiment, particularly as economic reports are released in the near term.
From the original
US trade policy uncertainty increased over the weekend. The Supreme Court ruling against IEEPA tariffs was not unexpected. US President Trump imposing a 10% universal tariff, then raising it to 15%, was less predictable. Details seem limited—will some goods be exempt? What about
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The desk notes that President Trump's latest tariff proposal could dampen inflationary pressures, contrasting with previous measures that had significant impacts on consumer prices. Per the full note from UBS, this round of tariffs might not exacerbate the existing affordability crisis as much due to exemptions on essential items like food, indicating a more strategic approach. With Federal Reserve Chair Powell signaling a shift away from explicit forward guidance, market volatility may increase, particularly as investors digest multi-faceted economic signals. Our view stays aligned with projections targeting a modest depreciation of the dollar against major currencies, as consumer sentiment adjusts to these evolving trade dynamics.
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The desk believes that the recent tariff announcements, termed a 'tariff-palooza' by MUFG EMEA, signal a significant increase in market volatility and recession risks. This aligns with our broader outlook for 2025, which anticipates heightened uncertainty in trade negotiations and fiscal policy. Per the full note from MUFG, the unexpected nature of these tariffs has jolted investor sentiment and corporate strategies, suggesting a more cautious approach moving forward. The potential for tariffs to be negotiated away quickly remains a critical factor in determining market stability.
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