UBS On-Air: Paul Donovan Daily Audio 'A year of upsetting everyone'
The desk interprets Paul Donovan's commentary, which describes 2025 as a year of dualities, forecasting solid economic foundations yet marred by political uncertainty. Per the full note , Donovan emphasizes that while developed economies may experience benign growth amid solid consumer data, impending political shifts—particularly from the U.S. administration—could create volatility in financial markets. This sets the stage for potential shifts in currency pair dynamics, notably in how investors might react to U.S. policy changes. The desk sees this as a call for increased caution in FX positioning given the complex interplay between economic indicators and political narratives.
What the desk is arguing
The desk believes that 2025 presents a complex scenario for FX traders, balancing economic growth against heightened political risk. Donovan highlights that consumers in developed economies are economically well-positioned, yet contends that markets may be underestimating the ramifications of political decisions, particularly those linked to U.S. trade policy.
He points specifically to the uncertainty surrounding President-elect Trump's proposed tariffs and consumer sales taxes, suggesting that while current consumer balance sheets and income growth appear robust, the political backdrop could disrupt this stability if extreme actions are implemented by the new administration.
Where it sits in our coverage
Current consensus for the EUR/USD stands at a target of 1.075, with a range of 1.04 to 1.12. Key players include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with consensus estimates, as the desk's outlook sits comfortably within the established range. The introduction of significant political actions could push outcomes toward the lower or upper bounds of these targets.
How other firms see it
Most firms expect a cautious approach due to the underlying political risks, including jpmorgan, which shares a similar outlook. In contrast, bofa appears more skeptical regarding the anticipated growth and has set a more cautious target at 1.04.
Traders should watch the dynamics in the USD/EUR pair, as any further developments in U.S. economic policy could provoke sharp FX adjustments, particularly reflecting shifts from Federal Reserve statements or other significant indicators that intertwine with political ideologies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 012025 expected to show strong consumer growth against backdrop of political uncertainty.
- 02Increased caution advised as markets neglect potential risks from U.S. policy.
- 03Market participants should closely monitor USD/EUR dynamics for volatility triggers.
Market implications
Traders should remain vigilant around 1.075 in the EUR/USD pair as it represents a potential pivot point. Any significant announcements related to U.S. trade policy could induce substantial market movements, particularly if they align with shifts in consumer sentiment or economic data.
Risks to this view
The primary risk to this outlook stems from any substantial shifts in U.S. policy actions that could either unexpectedly bolster economic performance, leading to a stronger dollar, or conversely, create inflationary pressures that negatively affect consumer spending. Such developments would invalidate the current bullish tone.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning, London time, on Thursday the 2nd of January. 2025 starts out as the best of times and the worst of times. An age of wisdom and an age of foolishness.
An epoch of belief and an epoch of incredulity. A season of light, a season of darkness, the spring of hope, the winter of despair. The problem for economists is in an increasingly polarised political environment, people will rigidly cling to one set of statements without accepting that the other set of statements might have some truth to them.
In fact, many of these statements could simultaneously be true. In my view, the role of an economist is to offer an impartial assessment of the policy position using clear and direct language to explain the critical points. I am confident this will end up offending everybody in the next 12 months.
Economically, 2025 starts with solid foundations, overlaid with political uncertainty. Investors in developed economies are in a good place and, economically speaking, developed economy consumers reign supreme. From a consumer balance sheet or real income growth perspective, there's every reason to suppose that 2025 will continue to enjoy benign growth.
The problem is the political uncertainty. What seems to be happening is that markets are accepting that uncertainty exists but are assuming that extreme positions will not be taken. US President-elect Trump's approach to aggressive US consumer sales taxes is a case in point.
The President-elect has made some strong statements on trade tariffs and seems very focused on them, at least according to social media posts. However, the markets are not pricing in the inflation or growth consequences of Trump doing what they say they will do. Other events support this benign market approach.
Trump's influential adviser, Musk, has publicly supported immigration, triggering debate within the Republican Party. Immigration is a policy area which, if campaign rhetoric were translated into policy, would have significant economic repercussions. Musk seems to have signalled a change in that policy position.
If a key campaign position can be adjusted so readily, markets are keen to assume that the negative consequences of trade tariffs will be similarly diluted. This is not just a US phenomenon, of course. There's an assumption that China will sort out domestic stimulus, that Germany will pursue a grand coalition government after the elections this year, and so forth.
In a more polarised world, with less and less middle ground available, markets do have to pick a side. The risk is obvious, however. If the side picked by markets is the wrong one, markets will then have to react abruptly, and the solid foundations of economic growth this year may then start to crumble.
That's all for today. Have a good day. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG, or its affiliate, UBS.
This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient, and is published for informational purposes only. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services. Investment advisory services and brokerage services are separate and distinct, differ in material ways, and are governed by different laws and separate arrangements.
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