UBS Morning audio comment: They’re back
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.
What the desk is arguing
The desk posits that Trump's new tariff initiatives, while potentially inflationary, are less likely to provoke the same consumer backlash as seen previously. Per the full note from UBS, certain key items are exempt, suggesting an understanding within the administration of the need to minimize public discontent regarding inflation.
Profit margins previously expanded due to earlier tariffs being passed onto consumers. New tariffs, particularly if aimed at the same products, could be absorbed by businesses, dampening the direct inflationary impact. This nuanced approach is vital, especially in light of consumer perceptions surrounding price increases that might be attributed to tariffs.
Where it sits in our coverage
The consensus forecast for EUR/USD currently stands at 1.075, with a range spanning from 1.04 to 1.12. Key firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This narrative aligns with jpmorgan and citi forecasts on a weaker dollar, adjusting to Fed policy changes as they diverge from traditional forward guidance strategies. The desk calls for a dollar depreciation, potentially placing this outlook at the upper limit of the consensus range.
How other firms see it
Aligned firms such as jpmorgan and citi anticipate that economic conditions will necessitate a weaker dollar going forward. Conversely, bofa holds a contrary view, asserting that dollar strength may persist against the backdrop of ongoing geopolitical tensions and potential risk aversion among investors.
As we analyze these dynamics, the EUR/USD and USD/JPY currency pairs will be crucial to watch, given their sensitivity to tariff implications and central bank adjustments across the board.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's proposed tariffs could have a muted inflation impact compared to previous measures.
- 02Key exemptions on food items suggest a strategic approach to minimize consumer backlash.
- 03The Federal Reserve's shift away from forward guidance could contribute to increased market volatility.
- 04Current consensus forecasts align on a weaker dollar against major currencies.
Market implications
Traders should focus on the EUR/USD exchange rate at the 1.075 level, monitoring for potential deviations as new tariff details emerge. Keep an eye on Powell's next statements, as they may significantly influence market sentiment and positioning.
Risks to this view
A reversal of this outlook could occur if inflation unexpectedly spikes due to other factors unrelated to tariffs, or if the Fed reinstates stringent forward guidance, changing market expectations drastically.
US President Trump is proposing more tariffs. This round will probably have less of an inflation impact than last year’s tariffs. View this email in a web browser They’re back UBS morning audio comment by Paul Donovan US President Trump is proposing new tariffs—an additional 10% for US consumers of goods from most major economies.
Someone in the administration seems to be aware that tariffing high frequency purchases aggravates inflation perceptions and the affordability crisis, and some key food items are exempted. The now-illegal tariffs were passed to consumers, but (generally speaking) their reversal did not reverse the earlier consumer price increases. This resulted in profit margin expansion.
Those profits could be used to absorb any new tariffs if the new tariffs are applied to the same products as the illegal tariffs. However, consumers may still blame tariffs for any price increase, whatever the cause. The ECB reports gold holdings now exceed US dollar holdings in official reserves.
It is mainly due to the soaring price of gold last year, and gold is a dollar asset. The dollar’s market share in reserves has been slowly eroded, and the use of Gulf economies’ reserves to rearm and rebuild may reduce its role in the future. Federal Reserve Chair Powell is signaling a desire to reduce or end forward guidance.
Ending the fabled dot plots would be welcome (they create a fantasy of precision and absolute certainty). Abandoning more carefully nuanced forward guidance risks increasing market volatility. Read important disclaimer 〉 Listen to today's Wednesday, 3 June update Listen now 〉 Recommended content Listen to past recordings in Paul Donovan's daily updates 〉 Nobel Perspectives - Exploring the questions that shape our world 〉 You have received this email because you registered at .
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