UBS On-Air: Paul Donovan Daily Audio 'Aprés nous, le déluge?'
The recent political instability in France, highlighted by the expected resignation of Prime Minister Bayrou following a parliamentary confidence vote, poses significant implications for the euro and broader European economic outlook. Per the full note from UBS, this marks the fifth change in French leadership in under two years, raising concerns about fiscal governance amid already high debt levels and demographic challenges. This context could lead to increased volatility in the euro as market participants reassess the stability of French economic policy ahead of critical eurozone fiscal assessments and potential market reactions. Moreover, closely monitoring the US employment report revisions will be crucial, as they could provide insight into the Fed's next moves, which can indirectly influence euro sentiment.
What the desk is arguing
The recent resignation of French Prime Minister Bayrou reflects a troubling pattern of political instability in France that could elevate market risks concerning the euro. As stated, this is the fifth prime minister change in two years; such turnover complicates efforts to maintain fiscal discipline and manage public debt, especially in an environment influenced by rising demographic pressures.
Additionally, the anticipated revisions to US employment data could also play a significant role in shaping market dynamics. Should the revisions reflect weaker job growth, it might alter the Fed's rate trajectory, potentially impacting the euro's performance against the dollar.
Where it sits in our coverage
Our consensus target for EUR/USD sits at 1.075, with a range from 1.04 to 1.12. Specific forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan's slightly bullish stance, indicating a belief that while the euro may face challenges, there is potential for upward movement should political conditions stabilize.
How other firms see it
Firms such as jpmorgan seem aligned with a more favorable outlook on the euro, predicting a gradual recovery in the medium term. Conversely, bofa presents a more cautious position with a bearish outlook for the euro, reflecting concerns over the implications of political instability.
Watch for movements in the EUR/USD pair as the eurozone grapples with its political landscape while keeping an eye on US economic indicators that can impact currency valuations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01French political turnover raises concerns over fiscal stability and market confidence in the euro.
- 02Potential revisions in US employment data could influence Fed policies, indirectly affecting euro sentiment.
- 03Five prime ministers in two years could lead to increased volatility and uncertainty in European markets.
- 04Monitoring both French and US economic indicators will be critical in assessing future euro performance.
Market implications
Traders should watch the EUR/USD pair closely, particularly any movement beyond the 1.08 level, which could indicate market positioning shifts based on political developments in France and employment revisions in the US. Additionally, remain alert for investor sentiment surrounding upcoming European fiscal policies.
Risks to this view
The primary risk to this outlook arises if political stability is restored in France, leading to a stronger euro. Additionally, if the US employment report reveals robust job growth data contrary to expectations, it may compel the Fed to adopt a more hawkish stance, putting further pressure on the euro against the dollar.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 9th of September. French Prime Minister Bayeux is expected to submit their resignation after losing a vote of confidence in Parliament yesterday.
The defeat is not a surprise to the markets and will mean, assuming somebody accepts the vacant job, that there will have been five Prime Ministers in France in the last two years. It's tempting to draw parallels to the Italian situation in the 1990s, governments coming and going through a revolving door, fiscal strains, high debt and an ageing population. However, if parallels are to be drawn, then they need to be complete parallels.
It's worth remembering that the Italian government has managed its debt perfectly well over the intervening years. In the United States, there is the benchmark revision of the US employment report when the Bureau of Labour Statistics reveals just how wrong the original numbers of the past year or so have been. Bear in mind that with plunging survey response rates, more and more of the real-time data is actually guesswork, not real-world reporting.
There is an expectation that the number of people employed will be revised down. That is not, of itself, a signal for the Fed to cut rates. Even if fewer people were employed, they generated the same amount of economic activity and the same amount of inflation, and it's that bigger picture that the Fed reacts to.
If, however, the momentum is for a sharper slowdown in employment in recent months, that narrative should influence Fed policy decisions. It is the momentum of employment growth, not the number of people employed, that is going to matter. There was a break in the reported US labour market performance in April of this year.
Before April, employment growth was relatively healthy. Since April, it has been, at best, mediocre. If that mediocrity becomes more negative, the Fed will have to take note.
We also get the US National Federation of Independent Businesses Small Business Survey. This has very little value of itself, but the tendency of the survey has been perceived as being biased towards a republican viewpoint of the economy, and that is worth bearing in mind. In a polarised political environment, if there is more concern being expressed by republican survey respondents, that does suggest a genuine widespread economic weakness.
In other words, there is a skew. A weakening of this particular survey carries weight as a warning, but a strengthening is of less use as an economic signal. In the United Kingdom, the British Retail Consortium's Like for Like shop sales survey for August showed stronger than expected growth.
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