Signal over Noise with Ulrike Hoffmann-Burchardi
The desk believes that the easing monetary policy anticipated for Q1, alongside a constructive global equity outlook, presents a favorable environment for risk assets and could support growth in FX markets. Per the full note source, UBS's CIO predicts a likely Fed rate cut as inflation trends down and the labor market softens, which could lead to a significant boost in economic activity moving forward. With the effective stimulus policies poised to impact growth positively, the forthcoming US economic data will be crucial in determining the sustainability of this optimism. Key indicators will likely shape traders' expectations around intervention from the Federal Reserve and broader market reactions.
What the desk is arguing
The desk argues that the anticipated cut in Fed rates, due to a weaker labor market and resilient disinflationary trends, will bolster economic growth through 2026. This posit is reinforced by UBS's view that fiscal and monetary policies are entering a stimulus phase that typically acts as a catalyst for increased market dynamism. The prediction of a one percentage point total easing cycle, as per the commentary, emphasizes the potential for reshaped economic conditions that could support risk markets,
The evidence pointing toward a labor market slowdown underlines trends in AI-driven job displacement, which UBS indicates could yield a labor market slack and contribute to lowering wage inflation. The confluence of fiscal stimulus, potential rate cuts, and a positive macro outlook serves as a strong foundation for risk sentiment, making the current environment more favorable for equity investments and, indirectly, favorable FX sentiment projections.
Where it sits in our coverage
Our consensus target for USD/EUR is 1.075, with upper and lower ranges provided as follows: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
This view aligns closely with JPMorgan, which sees the potential for USD strength supported by the Fed's dovish pivot, placing our desk's thesis towards the upper end of the prevailing forecasts.
How other firms see it
Aligned firms like JPMorgan advocate for a bullish stance based on a similar constructive framework, suggesting that easing measures will enhance market liquidity and risk appetite. In contrast, BofA holds a more cautious outlook, advising traders to prepare for potential resistance against an overly bullish market sentiment.
Related currency pairs such as USD/CAD and AUD/USD will likely react in tandem with the anticipated Fed policy shifts, reflecting broader risk dynamics influenced by US rate adjustments. Thus, USD traders should monitor these relationships closely moving into Q1.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UBS anticipates a Q1 Fed rate cut amid soft labor market and declining inflation.
- 02Fiscal and monetary policies are positioned for stimulus, potentially boosting economic growth.
- 03Labor market changes due to AI may further influence inflation dynamics.
- 04Current market conditions favor risk assets, which may enhance FX market stability.
Market implications
Traders should closely monitor USD/EUR levels around 1.075 as key economic indicators emerge. Any strong data reflecting labor market recovery could challenge the projected dovish stance of the Fed.
Risks to this view
Unexpectedly strong employment numbers or inflation data could prompt the Fed to reconsider rate cut plans, overturning the current bullish sentiment in risk assets and FX markets.
Happy New Year and welcome to Signal Over Noise. I'm Ulrike Hofmann-Bojari, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Welcome to 2026.
We charge into the new year optimistic about global growth. We frame our investment outlook through three key lenses, macro, structural, and bottom-up fundamentals. And together they support a constructive outlook for the global economy and equities.
Let me go through each one. First, the macro picture is turning from a headwind into a tailwind. We see GDP growth picking up and inflation coming down.
The reason is that in the first half of this year, both fiscal and monetary policies are in stimulus mode, a mix usually reserved for crises or war, or in this case, perhaps for the 250th anniversary of the United States. On the monetary side, a Q1 Fed rate cut looks likely, driven by a sluggish labor market and contained inflation. We see three disinflationary forces at play this year, tariffs, shelter, and wages.
This year marks the anniversary of US tariffs, creating a favorable base effect that should pull inflation lower. Shelter inflation is still on the downward trajectory and wage inflation is coming down from the slack in the labor market. And we expect the labor market to remain weak.
The low-hire, low-fire labor market partly reflects AI quietly replacing jobs, in our view. We lack solid data on AI's full impact on jobs, but early signals are telling. The areas capturing the most AI value, software engineering, customer service, and marketing, are also among the weakest part of the labor market.
And one recent study found that early career workers in the most AI-exposed roles have seen a 13% relative drop in employment. The bottom line? Slowing inflation and a soft labor market make a Q1 rate cut likely.
This would bring the total easing in the cycle to one percentage point and provide a meaningful boost to economic growth through 2026. Fiscally, there are three sources of stimulus that further help the economy grow in the first part of this year. Tax refunds from the old BBVA bill, delayed spending from the government shutdown, and government spend on defense and industrial infrastructure.
So with all these macro tailwinds, what could add to macro volatility this year? Last year, trade politics fueled volatility. This year, geopolitics may take over.
Middle East, Venezuela, and Russia-Ukraine remain the flashpoints. On Saturday, President Trump ousted Venezuela's Maduro from power. But the biggest signal for markets may be his warning to Iran and how oil prices respond.
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