UBS On-Air: Paul Donovan Daily Audio 'Bad news or good news?'
The desk views the recent agreement between the EU and the US on a 15% import tax as a mixed outcome for US consumers, perceived as bad news that the markets may have already priced in. Per the full note from UBS, while the agreement could be less detrimental than a worst-case scenario, it still undercuts the economic conditions that prevailed earlier this year. This complex backdrop is essential as traders navigate market expectations surrounding international trade dynamics and potential inflationary effects stemming from these new tariffs.
What the desk is arguing
The desk argues that the new 15% import tax on EU goods could lead to a deterioration in US consumer sentiment, despite being better than more drastic tariff measures. This points to continued inflationary pressures which may reduce disposable income for American consumers. Per the full note from UBS, this outcome is expected to heighten volatility in FX markets that rely heavily on transatlantic trade flows.
The desk notes that pharmaceuticals and steel are excluded from this tax, potentially protecting vital sectors but also suggesting sectors like manufacturing could face pressure from rising import costs. These dynamics will be pivotal in evaluating US economic health moving forward as we analyze consumer spending and inflation metrics in the upcoming reports.
Where it sits in our coverage
Our current consensus target for EUR/USD is set at 1.075, with a range between 1.04 and 1.12. Key contributors to this outlook include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
This vantage point aligns closely with our analysis of the trade situation, affirming that the desk's call is situated towards the upper bound of the range as we anticipate fluctuations based on ongoing trade negotiations.
How other firms see it
Firms like jpmorgan align with this perspective, focusing on the implications of US consumer sentiment and inflation due to the new tariffs. Conversely, bofa takes a more bearish view, forecasting weaker dollar strength driven by uncertainty in economic conditions impacted by these trade agreements.
EUR/USD reflects broader economic stability, and its trajectory will likely be influenced by upcoming US inflation reports as well as ongoing discussions between the EU and US officials regarding trade agreements and tariffs.
What the calendar says
No high-impact events are currently scheduled which could directly affect the trade and economic landscape influenced by these tariff changes. Traders are advised to keep a close eye on bilateral negotiations for further developments, particularly in regard to the pharmaceuticals and steel sectors.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The 15% import tax on EU goods is expected to increase inflationary pressures in the US.
- 02Exclusions for pharmaceuticals and steel may shield certain sectors, yet the overall economic outlook remains cautious.
- 03Markets may have preemptively priced in the implications of these tariffs, leading to heightened volatility.
Market implications
Traders should watch for volatility in the EUR/USD pair, especially as it approaches key levels around 1.075. Any additional insights from upcoming negotiations or economic reports could catalyze shifts in sentiment.
Risks to this view
The call could be invalidated if the expected consumer impact from the tariffs is less severe than projected, leading to stronger-than-anticipated US economic data. Additionally, if EU commitments to increased purchasing from the US materialize, it could diminish the perceived risks associated with the tariffs.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's two o'clock in the morning London time on Monday the 28th of July. The European Union and the United States have struck a trade deal whereby the tax burden on US consumers of European goods will rise to 15%.
The European Union and the United States run close to a balanced trade position. The United States sells services, the European Union sells goods. But global nostalgia gives an obsession with trade in goods, an obsession that has no economic basis, and so the mercantile imbalance is the political focus.
The European Union has made some vague pledges to buy things from the United States and invest in the country as well. New President von der Leyen has no authority to force such purchases or investments. But as we saw in US President Trump's first term of office, spin from the European Union may be all that is required.
Substance and actually following through on those vague pledges is much less likely to happen. And these are capital flows that the United States is therefore less likely to see. It should be noted that pharmaceuticals and steel do not appear to be included in any of this agreement.
So is this good news or bad news? It is better than the worst case scenario of a 30% tax, but US consumers are going to be taxed more for the things that they want to buy. Relative to what might have been, this is good news.
Relative to the economic situation at the start of this year, this is bad news. But it is bad news that markets have now anticipated. One aspect of trade policy that is worth noting is that the lost art of letter writing still appears to be missing in action.
Letters were supposed to be sent by the United States to 150 to 200 countries before this coming Friday, detailing what taxes US consumers would be paying. The flow of letters stopped several days ago. There is a suggestion that generic trade taxes will be applied to all those countries that don't get a personalised letter on headed notepaper from the US President.
Trade negotiations with China continue today and there are media reports that Trump's previous retreat will be extended, with the current situation lasting for another three months. The increasing tax burden on the US consumer will be felt mainly in the future. This latest round of tax increases are unlikely to affect US consumer prices until January 2026, not before.
What the trade deals do, at least for now, is reduce uncertainty. Uncertainty has been reported as a constraint on US corporate activity in the recent past. Certainly, the factory investment boom that took place under US President Biden has faltered this year.
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