MUFG EMEA
Loading…
FX BANK FORECAST · COVERAGE
Institutional FX coverage in your inbox
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 anticipates that the Federal Reserve will opt for a third consecutive pause in rate adjustments during the upcoming May FOMC meeting, a decision that could be perceived as a policy misstep. Per the full note from MUFG EMEA, this inaction may stem from the Fed's hesitance to act without clear data signaling the necessity for further rate cuts. The potential for a hawkish tone in the Fed's messaging could lead to a pullback in risk assets, as traders recalibrate their expectations for future monetary policy.
MUFG anticipates that the Federal Reserve will skip a rate adjustment for the third time in this tightening cycle. This decision to remain on the sidelines is fraught with risks, as the Fed could misinterpret economic signals and delay necessary rate cuts, which may compound existing market pressures.
Furthermore, if the Fed's communication takes a more hawkish tone despite a pause, risk assets could experience significant declines as investors adjust their expectations. The delicate balance the Fed must maintain makes their upcoming decision critical, particularly as economic conditions continue to evolve rapidly.
Our current consensus target supports a modest recovery nearing 1.075, which aligns with MUFG’s cautious outlook on the Fed's potential decisions. However, if the Fed steers towards a more hawkish stance unexpectedly, it could lead to a departure from our projected range, indicating less alignment between the markets and the Fed's actions.
Among other forecasts, notable firms have set targets that reflect varying expectations regarding the Fed's policy. Specific published targets include:
Analysts at several leading firms share a similar sentiment regarding uncertainty surrounding the Fed's next move. For instance, Goldman Sachs and JPMorgan are aligned with MUFG's expectation of a cautious approach, while Bank of America posits a contrary view that supports immediate action rather than a pause.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
A continued pause by the Fed could lead to increased volatility in risk markets, especially if investor expectations are not met. A hawkish shift in rhetoric despite a decision to hold rates could exacerbate selling pressures across equities and other risk assets, necessitating cautious positioning.
Risks to this view
The primary risk is that the Fed's decision to pause evolves into a policy misstep if economic indicators demand a clearer course of action. Additionally, misalignment between markets and Fed communication could result in sharp market corrections.
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and I'm joined today by George Goncalves, MUFG's Head of U.S. Macro Strategy.
It's Tuesday, May 6th, 2025. Welcome back to the podcast, George. Hey, John.
Great to be back. Good to have you. So, all eyes on the FOMC meeting this week, and for our listeners' benefit, we're recording this episode on Tuesday, May 6th, and the conclusion of the FOMC meeting is on Wednesday, May 7th, with the release of the FOMC statement, as well as Chair Powell's accompanying press conference.
Again, no summary of economic projections. But before we jump into the Fed, let's catch up on what is a pretty heavy slate of developments across the macro and markets landscape. Sure.
Absolutely. And it's going to inform the Fed, too, so I think it's important to kind of level set where we are heading into the Fed meeting. We got a first negative GDP print.
We were discussing it last time we were on the podcast, but there was definitely risks to a negative number coming out, given the sort of big changes and pulling forward of activity impacting the net exports calculation, a lot of inventory kind of building up as a result of that, too. But at the same time, if you look at the final demand, there's been a pretty decent drop-off. And so I don't think it's just related to the tariffs.
I think there is and there has been weakness in the economy. And again, this is Q1 GDP before the tariff announcements, even though people were anticipating, it's still before the actual shock that we had in April. And then we also have gotten another NFP report under our belt.
There was some trepidation going into the number of concerns that it might start to capture some of these declines in government jobs that have been impacted by the doge effect, or just in general, just the shock from the tariff announcements. And in fact, the number surprised to the upside. So been a lot of sort of kind of macro developments.
I've been kind of saying the damage has been done, that the soft data this time, you shouldn't ignore it, that it is kind of indicative of where we're heading for the economy. But then you get a number like NFP, and that kind of throws in a wrench on that idea. So we're at an interesting crossroads.
Yeah, totally. For a split second, that weak data, sorry, the weak soft data was looking like the canary in the coal mine for the hard data, you know, after that GDP number. But then you get whiplashed by the employment report, which, as you say, caught many of us by surprise.
I'd even argue it was solid. You know, you had higher than expected headline growth to employment. And you also had an unchanged unemployment rate for good reasons.
You had the labor force increase, you had household employment increase. So I guess the question really is, does this all mean the economy can weather all of this uncertainty? I'd argue that stocks and other risk assets certainly seem to think so.
What's your take? Yeah, look, I think what's been interesting, I mean, equities have clearly, well, notwithstanding the last few days of kind of giving back some of the gains, but there was a nine-day winning streak in equities, largely recouping the losses coming out of the Liberation Day downdraft that happened earlier in April. But you were not getting commensurate moves in a similar fashion for like leveraged loans, the more credit-sensitive sides of the financial landscape still hasn't fully recovered.
And then we've had a lot of volatility in rates. We've had attempts at rallying to new lows in the front end of the two-year, then giving all that back and then some around the NFP print. And then, of course, the dollar has been in a deep bear slide, or at least a decent correction on a full bear market.
The speed of the dollar sell-off has been alarming and hasn't turned around yet enough to kind of offset these losses. So we're getting mixed signals on the markets. I'm still of the view that it feels like a bear market bounce in risk assets, in particular to equities.
And we'll see what happens with the Fed next. And I think that's going to be the next big catalyst that could really kind of put the trend in motion if the Fed sounds a little bit more hawkish. Yeah, for sure.
And let's talk about that. So you bring us back to the Fed. You and your team recently published your May FOMC preview entitled, Inaction is Action.
And in that piece, you articulate that you expect the Fed will have a difficult time threading the needle and making everyone happy, perhaps not too surprising. But not to steal your thunder, but I am sympathetic to the argument in the piece that staying on the sidelines to wait for the data, you know, presumably to confirm that further cuts are needed or not, means that those cuts themselves might just come too late. Tell our listeners what they should expect from the FOMC statement as well as Chair Powell's press conference.
Again, no summary of economic perceptions, you know, but also, you know, where could you be wrong? What are some of the other scenarios you could see playing out? And obviously, accompanying market reaction would be helpful as well.
Absolutely. And so there's obviously the age old problem for us strategists and Fed watchers is what the Fed should be doing versus what they will likely do, both in the short run and the medium term, because one action might lead to a different kind of outcome later on. You know, going into this May meeting, I was of the view that if the data would continue to show signs of weakness, that the Fed would signal more of a dovish message.
But, you know, kind of on second thought, thinking about, you know, the kind of pressure they've been under as well as really they don't feel like they have the totality of the data that we might likely get a repeat of the March statement where they took out the removal of the kind of balance of risk assessment and they moved to stating that the outlook is uncertain. I'm sure they're going to emphasize that. And then if Chair Powell mentions they're still waiting and seeing and if that's the approach they take and if he really goes even one step further and dismisses that Q1 GDP wasn't that bad, that would really be really hawkish and kind of suggest that they want to be on hold for even longer than just another meeting.
And I think that's where I would be wrong in terms of our medium term house view, which we still have the June cut in place. Market expectations have taken probabilities well under 50 percent, somewhere hovering around 30 percent. If the Fed wants to bring that back to balance, they would deliver a dovish message.
But I think that most likely we're going to get more of a hawkish message tomorrow after the Fed statement is released, as well as the press conference. Chair Powell typically leans dovish in the way he answers questions. But if he's uncharacteristically hawkish, I just don't see how markets can handle that.
You know, there's been, again, as I mentioned before, a pretty big bounce back in risk assets. It feels like a bear market bounce, doesn't feel like there's follow through. If the Fed doesn't, you know, thread the needle right and comes across a little bit hawkish or even outright hawkish, I think you get another final leg lower, which ironically might then motivate them to cut in June and July if that financial condition's tightening were to only exacerbate the sort of skittishness on the part of consumers and investors.
So it's kind of like this kind of like what comes first sort of thing. Sounds pretty path dependent. Yeah, 100% path dependent.
And really, I don't think the Fed wants to get boxed in one way or the other. But basically by preferring to have the optionality to wait and see, that's not a message the market would want to hear. And I think that would create both a sell off, basically a sell off for most assets, except for the dollar probably would get some support.
Yeah, it makes a ton of sense. So, you know, there's a lot. That was a great summary of the piece.
There's a lot more there. I really would encourage our listeners to check out George's FOMC preview, again, entitled Inaction is Action, appropriately titled, perhaps I should say. And if you are still not receiving George's strategy reports, do check out the MUFG research portal at www.mufgresearch.com, where you can find all of your favorite MUFG research, as well as to sign up to have it conveniently delivered directly into your inbox.
Great stuff, as always. Thanks for coming on the podcast, George. Thanks, Tom.
And thank you for listening to the MUFG Global Markets podcast. Rate, review, and subscribe on Apple, Spotify, or wherever you get your podcasts. And reach out to your MUFG sales rep for any further information.
Check back soon for more insights from the Global Markets research team.
How we cover this story
See how the Federal Reserve outlook moves the USD bank consensus across 30 desks
View Federal Reserve outlook