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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
The desk views the recent fluctuations in the market as indicative of a recalibration of growth expectations, with U.S. economic indicators suggesting cooling momentum, particularly influenced by fiscal policy changes and ongoing geopolitical issues. Per the full note from the UBS Macro Monthly Podcast, this assessment indicates that while there are concerns of a growth scare, the adjustment is more of a normalization following earlier optimistic projections. Market participants are closely monitoring pivotal economic data releases and central bank communications to gauge further directional cues in FX markets.
The desk frames the current macroeconomic environment as a necessary adjustment period in U.S. growth expectations, particularly as recent data has prompted market recalibrations. Per the UBS Monthly Macro Podcast, the cooling income growth amidst policy adjustments indicates that a growth scare might be an overreaction as fundamentals realign.
Supporting this view, UBS's Evan Brown highlights that the market had entered the year with overly optimistic growth forecasts which are now facing downward revisions due to a mix of factors including trade policies and fiscal changes. The recent slowdown in U.S. equities, particularly in cyclical sectors, reflects this sentiment as expectations adjust toward a more cautious outlook.
Currently, our consensus target for the related currency pair is 1.075, with a range bound between 1.04 and 1.12. Notable firms include: - jpmorgan — target 1.10 (Mar26) - bofa — target 1.04 (Mar26)
This view aligns with jpmorgan, which shares a similar outlook and target, suggesting a bullish sentiment towards the pair compared to bofa, which presents a more cautious stance at the lower end of the range.
In general, firms such as jpmorgan are aligned with the desk's view, advocating for a cautious yet optimistic approach towards U.S. growth and the corresponding FX implications. In contrast, firms like bofa take a more bearish stance, anticipating a sharper decline in growth.
Looking ahead, attention should be directed towards relevant economic indicators coupled with Federal Reserve sentiments, particularly regarding inflation and rate trajectory, which will have direct implications on pairs like USD/EUR.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Key levels to monitor include the 1.075 mark, which could serve as a resistance point given the current sentiment. Traders should also keep an eye on any upcoming economic indicators that may influence market views significantly.
Risks to this view
Should there be a significant deterioration in economic indicators or unforeseen geopolitical developments, this could invalidate the desk's growth outlook, leading to a stronger dollar than currently anticipated.
I am pleased to welcome back to the show, our UBS Asset Management Monthly Macro podcast series. Each month we hear from the top investment professionals from the UBS Asset Management Multi-Asset Team. Today I'm pleased to introduce our speaker, Evan Brown, Portfolio Manager and Head of Multi-Asset Strategy and Fatou Conte, Multi-Asset Investment Specialist.
Fatou, with that brief introduction, I'll pass it over to you. Hey Siobhan, welcome everyone to our call today. Recently there's been a lot of notable fluctuations within the market and it's been influenced by several key factors including trade policies, recession concerns, inflation and questions on U.S. dominance in AI.
So today's call will touch on these topics as well as our views and positioning within the MAP portfolios. So Evan, recently there's been some soft macroeconomic data come in and that's caused what the market is calling a growth scare. So from your point of view, what's the state of the U.S. economy?
Thanks Fatou. Yeah, so it's been an eventful few weeks in the markets for sure and some of that has been really what I'd call the market adjusting lower its expectations of growth. I don't think we've had a proper growth scare.
Some weakness in U.S. equities, some unwind in the more cyclical areas of the market relative to defensives, but I see it more as we came into the year with pretty optimistic expectations for U.S. growth and that's just needing to be knocked down a little bit as a result of some of the things that preceded the Trump administration, which is immigration was already slowing and so that just overall income growth is cooling off. Some of the fiscal supports, particularly state and local, those rolling off, housing facing some challenges as well, but we're also having an adjustment lower in growth because of the rollout of policies from the Trump administration have been more on the less friendly side, less market friendly side or economy friendly side of his policies, those being on immigration, which certainly an important policy objective and a major reason why he was voted in, but when you shut down the border significantly, then that means a decline in the labor force, so that weighs a little bit on spending. And then, of course, the prioritization of tariffs ahead of things like tax cuts, which look like they're going to be kind of pushed out until later this year.
So that sequencing of focusing a little bit on the more damaging things earlier I think has led the markets to adjust lower their growth expectations. I would call it a cooling, not a growth scare. The hard data would differentiate between soft and hard data.
So hard data, that's the actual activity, right? That's the employment report. That's the retail sales report.
All that is showing a gentle cooling. I think what's spooking people a little bit is the soft data. Soft data is survey data, asking people how they feel.
So we had University of Michigan's consumer confidence survey on Friday, and it did not make for good reading. It showed consumers quite concerned about employment prospects and concerned about inflation as well. And so in general, we emphasize the hard data much more than the soft data.
Watch what people do is more important than what they say. But the soft data should raise some concerns and maybe raising a little bit of concern in the administration. I mean, since that report has come out, we've seen a little less tweeting from the president on tariffs and more kind of reports of getting a little bit more process-driven and methodical in terms of laying out the tariff strategy as opposed to having a lot of noise in the system.
So hopefully that cools things down a bit. Our base case, we're moving from a 2.5% to 3% real GDP economy over the last couple of years to something more like 1.5% real GDP, which sounds like a big cut, it's cut in half. But when you look at it relative to trend growth, what you'd normally expect the economy to be running at, that's around 2%, we're slightly below that.
So a little cooler growth, but we're not overly concerned about recession at this point. Now on the topic of Donald Trump, President Donald Trump has recently implemented a series of aggressive tariff measures targeting major U.S. trading partners, notably Canada, Mexico, China, and now the EU. What will likely be the economic impact of Trump's policies?
And from your view, are tariffs already priced in markets? Yeah, so we always knew that the tariffs were going to be a part of this administration. They're used as negotiating tools for non-economic outcomes, like what we've seen with Canada and Mexico on fentanyl and border crossings.
We've seen it being discussed as a revenue raiser to fund tax cuts. We've seen it discussed with what President Trump has long been focused on well before he was president, which is having more fair and balanced trade. And he certainly has a point in that most of the rest of the world has higher tariffs and non-tariff barriers to trade than the U.S. does.
So I think that was all to be expected. I think what's kind of raising the risk is, one, I don't think most people expected him to go aggressively after Canada and Mexico. He already had negotiated, renegotiated NAFTA into the USMCA.
It was his deal. And then going on and threatening 25% tariffs and then implementing them and kind of stepping back with some exemptions, this on and off. That's been what surprised people.
In Canada and Mexico, that's where you have just more interlinkages to the U.S. economy. It's more damaging to the U.S. economy because of how interlinked the supply chains are, particularly in the auto sector. And then the other thing is just, as I mentioned, kind of the haphazard nature in which these tariff threats are going out and kind of the lack of a clear plan.
Now, fortunately, we will get more clarity. April 2nd is when the administration is due to lay out its more formally its strategy in terms of tariffs. There will be more sector-specific tariffs, potentially on autos and pharmaceuticals and semiconductors, as well as reciprocal tariffs, essentially the U.S. tariffing nations the same as they're tariffing us here.
I think what we expect coming out of that April 2nd release is embedded in that 1.5% real GDP forecast, but there's kind of risks to the downside, also risks to the upside relative to our forecast. I mean, the risk to the upside would be that President Trump and the administration allow a little bit more time, announce tariffs, but then allow ample time for businesses to provide feedback and, most importantly, allow for time for negotiation with our trading partners so that we can see if we can actually end up getting tariffs around the world coming down in certain areas. But then there's risk to the downside, which is the administration could put the tariffs on immediately in some cases and then talk about or not talk about exemptions later.
And another downside risk is if there's a lot more focus on non-tariff barriers that are kind of harder for some countries, like when you consider Europe and their VAT tax, it's a lot harder for them to really negotiate because that's a tax they have not just on imports but domestic goods as well. So it's going to be very complex, very interesting to see what comes out this April 2nd date is very important. Like I said, upside and downside risks relative to expectations on it, but I'm hopeful at the very least that we have some quiet going into that announcement and that also the Trump administration is getting feedback from businesses that they'll take into account in terms of the impact of these tariffs.
So it's very uncertain, to be frank. So base case, there's a hit to growth from these tariffs. There's a one level increase in the price, a one-off increase in prices in terms of inflation.
And then the market kind of moves on, but we'll see what comes out on that. So mark your calendars. Apart from tariff policy, of late there's been a few interesting developments outside the U.S.
So from your view, what's the latest on the global economy? So the global economy is, if you think of, there were high expectations for U.S. growth coming into this year, and those have been marked down, it's the opposite in the rest of the world. There's just very low expectation.
I don't want to give the impression that the rest of the world is booming by any means, but there are just such low expectations for European growth and Chinese growth. And with China, you've seen some stabilization. Their activity data is coming in a little bit better.
Some of the policy measures they put into place in the fall of last year, they're starting to take effect. But the big game changer has been in Europe with Germany's response. Europe, they tend to only react when there's a crisis, and you can argue that President Trump and J.D.
Vance going over to Munich and basically saying, hey, I'm Russia, Ukraine, you're on your own. That was a crisis. That was a wake-up call for Europe.
And you had the German election, you had a coming together of various parties, and an agreement of, first of all, we Europeans need to be spending a lot more on defense, which is what President Trump wants them to do. But also, if we're going to be a player on the major stage, we need to grow. So everyone's been waiting for years for Germany to use, it's got enormous fiscal space, to use it and stimulate domestic demand and invest in infrastructure.
And they're doing it in size. So that is going to have effects. Germany is the largest economy in Europe, but also it should have some trickle-down effects to the rest of Europe as well.
So you've seen a big upgrade in European growth expectations, a few tenths of a percent this year, likely. But then in the out years, like 26, 27, that's where you're starting to get a half percent higher in European growth forecast each of those years. And with the U.S. cooling, it's like all of a sudden, hey, Europe is actually going to provide some growth here.
So we are seeing policy responses that are kind of making these economies a little bit more durable, although let's be fair, the tariffs that are likely coming on April 2nd, Trump will be going after Europe as well. So we need to curve our enthusiasm a little bit. But overall, we're seeing really, really positive domestic policies in Germany that I think are going to significantly upgrade the growth picture.
It's happened so far, we think there's room for it to continue. So shifting a bit to markets, year-to-date, the S&P 500 is down about 5 percent. And given that the MAC-7 stocks in particular have been hurt, do you think this is more of a concentrated correction?
Or are there larger themes at play? Yes. So we talked about the kind of downgrade in economic growth in the U.S. and that's going to have an impact on U.S. stocks.
But yeah, as you say, most of the damage has been done in the MAC-7. And that is a function of a few things. I mean, first of all, that's where the valuations were the highest, right?
And so there's just a lot of good news in the price. And the earnings have come in fine, but the gap in terms of earnings growth versus the rest of the market has been enormous over the last couple of years. It's normalizing pretty quickly as we speak.
And then, of course, you have the deep-seek moment, questioning, okay, well, if China can create, with a lot lower cost and a lot less CapEx, a very powerful model, then there's been some questioning on the return of investment from all this CapEx spend. And then the major hardware producers, will you need the same kind of CapEx investment going forward? So that's been all at work.
I think a lot of this too is just people are de-risking and they're selling what they own. And everyone owns the MAC-7 in size. And so that de-risking is just part of that.
I would consider this an adjustment period. I mean, these are still incredibly healthy companies in terms of cash flow. And valuations are becoming a lot more attractive.
I mean, they're very expensive, but they're coming down. And I would just say on a go-forward basis, it's just going to be more nuanced in terms of the performance of these companies. And probably more of a stock picker's market, better environment for active enterprise as the MAC-7, which it's been a very concentrated market over the last couple of years with the MAC-7 kind of driving the overall market higher.
If the MAC-7 is a little bit more nuanced story, then active has room to do better. And we're seeing that with our managers this month, the performance has significantly improved. And that's one of the factors going into that.
So as the U.S. equity market has kind of taken a hit, international equity markets, ex-U.S., have outperformed year-to-date relative to the U.S. So can you talk about some of the core reasons behind this? And then given these catalysts, has U.S. accessionalism come to an end?
So, yeah, it's a big question there at the end. In terms of why we've seen this outperformance, I mean, everyone has known that international markets have been quite cheap relative to U.S. markets for some time. What you needed was a catalyst.
And we got that catalyst, which has been this derating of U.S. growth. And then kind of the deep-seat moment I mentioned, creating some headwinds for U.S. tech. And the international markets have, on the other hand, like I said, low growth expectations coming in, low valuations coming in, and then an upgrading of rest of the world's growth and earnings.
So we have been seeing earnings improvement in much of the rest of the world. We've had this policy response in Europe. We have China.
You know, even though the growth is picking up and it's fine, China's still got major economic challenges. But the deep-seat moment, as much as it kind of shook U.S. tech, it revived Chinese tech. And you've seen a surge in performance there.
So look, I think the kindling was always there, and now you've had multiple catalysts hit at the same time. And that's how you get this massive reversion that we've seen in a very short amount of time. That question, has U.S. exceptionalism come to an end?
No, I mean, I think it's – the U.S. still has the most dynamic and innovative companies in the world and still has a very pro-business environment, for the most part. We are going through a period of uncertainty related to the tariffs, which has made it less attractive. We're just – these are less business-friendly policies, let's call them what they are.
But I think, you know, there's still a lot going for the U.S. I think what this is more than, you know, is U.S. exceptionalism alive or dead? It's just you need to be diversified, right?
It's been nearly 15 years of you could just own the NASDAQ or the S&P 500. And I think what this moment is waking people up to is that, you know, when something's priced to perfection, right, it only takes a little bit of less good news for it to come off. And when something is completely cheap, it just takes a little bit of good news for it to revive.
And there's fascinating things happening in the market right now. And the message is just to be diversified. Thank you for tuning in.
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