UBS On-Air: Paul Donovan Daily Audio '90 degrees of deals'
The desk observes a retreat in the U.S. administration's ambitious goal of securing 90 trade deals in 90 days, which may have significant implications for market sentiment and U.S. dollar dynamics. Per the full note from UBS, there has been only a lukewarm agreement with the UK and limited progress against China. The anticipated de-escalation with major trading partners is overshadowed by ongoing uncertainties regarding tariffs, which could hinder consumer spending and macroeconomic stability. These developments come at a time when the U.S. Senate is also struggling to pass a budget, placing additional pressure on economic prospects.
What the desk is arguing
The desk perceives that the recent trade negotiations and policy uncertainty could generate volatility in the U.S. dollar, particularly against major currencies. With evidence of a 'half-hearted agreement' and ongoing tariff talks—according to UBS—investors might perceive further iterations of these trade negotiations as interim fixes rather than substantial progress.
Additionally, the mention of the Senate's budgetary impasse suggests that economic stimulus may remain stifled, potentially impacting consumer spending patterns negatively. As noted, lower-income households are likely to be most affected, leading to broader economic implications due to reduced consumption.
Where it sits in our coverage
While the desk currently maintains a consensus target of 1.075 for the EUR/USD pair, the landscape is illustrative of broader market and economic dynamics. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with firmId jpmorgan, which sees a stronger euro, while bofa presents a contrary view with a lower target, reflecting the conflicting interpretations of the dollar's resilience amid the current economic backdrop.
How other firms see it
jpmorgan and citi share a similar bullish stance on the euro, anticipating an upward trajectory in light of the anticipated monetary policy divergence. Conversely, bofa maintains a bearish outlook, citing potential dollar strength as trade uncertainties loom larger.
The focus will also be on key economic indicators such as U.S. consumer spending patterns and inflation metrics, which will inevitably impact the EUR/USD trajectory amidst ongoing trade discussions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. trade deal ambitions retreat could pressure dollar strength.
- 02Uncertainties around tariffs likely to hinder consumer spending.
- 03Senate budget challenges suggest limited fiscal stimulus.
- 04Trade policy developments remain a significant driver of FX volatility.
Market implications
Watch for potential volatility in the Euro against the Dollar if negotiations do not yield any substantial agreements. A close eye should also be kept on consumer spending data, as it may influence Fed policy discussions in the context of current trade dynamics.
Risks to this view
Should the administration announce significant new trade agreements or if there’s a surprising unified consensus in the Senate on the budget, that could lend unexpected strength to the U.S. dollar. Furthermore, any positive shifts in consumer confidence could negate bearish interpretations of trade policy risks.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 1st of July. The Financial Times is reporting that the US plan for 90 trade deals in 90 days is now in retreat.
This is because with little over a week left there is one half-hearted agreement with the UK and a de-escalation with China and not much else. The suggestion from the administration officials is that there will be an interim series of agreements which basically means that the 10% tax on US consumers stays in place while discussions continue. However, there are concerns that the rather wild swings in US policy mean that uncertainty about future trade taxes on specific products are preventing deals from being made.
As the UK discovered with steel and aluminium, you think you have a deal and then the rules change which makes the value of the original deal somewhat questionable. The uncertainty about where tariffs end up may also be an issue for the US Federal Reserve as it tries to decide how much economic damage is going to be done by the trade taxes. The US Senate is still debating plans to keep the US on an unsustainable debt path.
A vote on the budget is expected today but is very finely balanced. Two Republican senators are opposed to the budget and if there is a third opponent, assuming the Democrats vote as a bloc, the measure will not pass. Estimates are assuming that the deficit will end up being more or less unchanged relative to GDP, meaning that in a macroeconomic sense there is no stimulus provided.
However, the deficit will be redistributive and that redistribution will affect patterns of consumer spending at a sector level and it may reduce overall consumer spending as money is transferred from lower income brackets to higher income brackets. Lower income households tend to spend all their income, so if that income is reduced then after a period when credit might be used, the spending will have to decline. The question is whether higher income households will compensate by spending the additional income that they receive.
The UK's BRC Shop Price Index rose higher on food prices. There was a suggestion from retailers that the price increases were due to changes in government policy, but the data itself undermines that argument. Non-food prices remain firmly in deflation territory, with deflation in five of the seven subcategories.
As retailers face the same labour costs, more or less, that discredits the idea of common government policy driving prices, unless the suggestion is that food retailers are uniquely incompetent in managing their cost base. The actual drivers of inflation matter, for if this is not a general issue with the labour market, service sector inflation – not covered by the BRC report, but more important economically – is then likely to be more muted. There are US business sentiment polls and Japan has already published its Tankan business sentiment survey.
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