UBS On-Air: Paul Donovan Daily Audio 'Sense or sentimentality?'
The desk views the recent improvement in UK consumer sentiment as potentially misleading, with actual spending data showing weakness, particularly in retail sales. Per the full note from UBS, while consumer sentiment rose contrary to expectations, April retail sales data revealed substantial declines in sectors such as auto fuel. This suggests a decoupling between sentiment and spending behaviors, a trend seen since the financial crisis, which complicates the outlook for GBP traders looking at domestic consumption as a driver for currency strength.
What the desk is arguing
The desk frames this as a classic case of sentiment failing to align with economic realities. According to UBS, UK consumer sentiment showed unexpected strength in May, rising despite weaker-than-anticipated retail sales data for April, which highlighted a more than 10% decline in auto fuel sales from March. This disparity underscores the potential for over-optimism regarding consumer health and economic stability.
The significant drop in auto fuel sales, as noted by UBS, suggests a behavioral shift influenced by external factors, such as increased remote working and geopolitical tensions impacting fuel demand. Furthermore, the GFK measure of consumer sentiment has lacked robust predictive power since the global financial crisis, indicating that traders should be cautious in interpreting this latest uptick.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.075, with a range of 1.04 to 1.12. Specific targets include: - jpmorgan: 1.10 (Mar 26) - bofa: 1.04 (Mar 26)
This view aligns with the broader consensus, particularly with jpmorgan reflecting a cautiously optimistic outlook at the upper end of the range. However, it also contrasts sharply with bofa's more pessimistic stance.
How other firms see it
Overall, firms like jpmorgan are optimistic regarding GBP, while bofa presents a more bearish perspective. This divergence illustrates a fundamental disagreement about the efficacy of consumer sentiment as a gauge for currency performance, especially in light of recent consumer behavior trends.
Trade considerations here may also interact with broader themes, such as the ECB's ongoing discussions regarding interest rate policies, which could spillover into GBP dynamics, particularly against the EUR.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK consumer sentiment improved in May despite weaker retail sales.
- 02Decline in auto fuel sales suggests consumers are adjusting behavior based on remote work and external pressures.
- 03The gap between sentiment and actual spending behaviors has persisted since the financial crisis.
Market implications
Traders should closely monitor GBP/USD around the 1.075 level as a critical pivot point. Additionally, any upcoming commentary from the ECB could impact GBP sentiment, particularly if their policy direction diverges from UK economic indicators.
Risks to this view
A reversal in this thesis could occur if subsequent retail sales data indicate a strengthening in consumer spending or if sentiment indicators start to reliably correlate with economic outcomes. A shift in ECB policy autonomy could also impact GBP sentiment dramatically.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 22nd of May. The economic data calendar has more sentiment surveys than is good for it.
The UK's GFK consumer sentiment data for May showed an improvement against expectations for a decline. This would be a reason for optimism, were it not for the rather inconvenient fact that since the global financial crisis, UK consumer sentiment data has had only the most distant of relationships with economic reality. April retail sales, which is a volume, not a value measure, so does not include oil price increases, was somewhat weaker than had been expected.
But the reported pattern of consumption was what was interesting. Auto fuel sales were a special area of weakness. They were down more than 10% compared to March, and are suggesting that consumers responded to the war by driving less.
Working from home is quite common in the UK and as well as being more economically productive, this obviously reduces fuel demand. What is politely termed variable weather weighed on clothing sales. The German IFO business sentiment poll is next on the agenda.
Business sentiment on this measure has fallen quite sharply from the recent highs that were hit last September. German manufacturing sales have risen 3% in real terms since last September, although they are below pre-pandemic norms. Consumer sentiment actually improved in the latest data in Germany against expectations for a decline.
This, again, may just be catching up with reality. German consumer sentiment weakened in 2025 as German consumer spending increased in real terms. It's almost as if consumers say one thing and then do another.
We do hear from the ECB's Lagarde today. The recent noise from several ECB members does make it sound like the central bank is preparing to make a policy mistake and raise rates without justification. Whether resistance to that potential policy error is in place will be important for investors.
The United States is offering revisions to the Michigan consumer sentiment data. Given the volatility of the news cycle at the moment, there may well be revisions to the numbers. The data is of little direct use, but the difference in views of supporters of the Republican Party and the Democrat Party is worth monitoring.
Any sign of disquiet in the Republican camp is likely to have disproportionate importance when it comes to policy setting, especially around things like the affordability crisis. The big increases in gasoline prices in the United States took place in late April and early May, and so those should already be in the data. But the persistence of high oil prices, alongside other soaring costs of high-frequency purchases, may still exert some damage.
Republican sentiment is reported to be the weakest since US President Trump was elected, but it is substantially higher than at any time in US President Biden's administration. Democrat sentiment is now less than half what it was during Trump's first term, and it's close to all-time lows. Political independents are reported close to Democrat levels of sentiment now.
But sentiment rather than substance is also affecting the oil price. Iran's semi-official news agency did at least give some verification to recent assertions by Trump about the gap between the two sides narrowing. But then additional Iranian statements on keeping enriched uranium and tariffing ships passing through Hormuz pushed oil prices back up again.
The ongoing challenge for investors is that Iran holds the cards at the moment, and investors have little way of knowing what those cards are, or even what game the Iranian administration is playing. Trying to weigh risks through interpreting reports in the semi-official media and the release of viral Lego-style videos doesn't really offer that much precision. That's all for today.
Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS.
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