UBS On-Air: Paul Donovan Daily Audio 'BBB'
The desk interprets recent comments from Paul Donovan, Chief Economist at UBS, regarding the potential implications of the current US budget proposal, referred to by President Trump as a "Big Beautiful Bill." Per the full note source, the challenges posed by this lagging fiscal initiative are compounded by ongoing concerns surrounding the US credit rating, which could negatively influence investor sentiment. The failure to pass the bill, alongside tax cuts that maintain deficits without stimulating growth, is likely to keep pressure on the bond market and ultimately affect the US dollar's standing. The anticipated market dynamics hinge on a greater focus on fiscal sustainability amidst evolving congressional negotiations, highlighting an urgent need for clarity in policy direction going forward.
What the desk is arguing
The desk frames this as a critical juncture for US fiscal policy, with implications extending beyond mere budgetary measures to the broader creditworthiness of the United States. Per Donovan's analysis, the adjustments currently being discussed within Congress may jeopardize the fiscal health of the nation, leading to potential downgrading risks of the US credit rating from its current AAA status.
Supporting this thesis, Donovan notes that a significant portion of the proposed budget aims to extend existing tax cuts without new fiscal initiatives that would provide meaningful economic growth. With the deficit projected to rise, the fiscal sustainability remains in question as measures intended to stimulate growth appear insufficiently robust.
Where it sits in our coverage
Given our current consensus for key USD crosses, USD/EUR is targeted at 1.075 with a range forecast from 1.04 to 1.12. Firms with notable targets include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This view aligns with the forecasts set by jpmorgan, which expects upward pressure on the USD as fiscal policies evolve; however, the forecasts show divergence from bofa, which anticipates a more bearish outlook for the USD at the lower range of our consensus.
How other firms see it
Firms like jpmorgan and citi align with our perspective, foreseeing a weakening USD amid fiscal uncertainty. Conversely, bofa argues for a stronger EUR based on concerns about the sustainability of US fiscal measures. Tracking the USD/EUR pair will be crucial, especially in light of possible shifts in fiscal policy.
What the calendar says
With no significant events on the immediate horizon, traders should remain alert for potential surprises in legislative negotiations that could arise ahead of the end of the congressional session, impacting market sentiment in real-time.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01A political impasse may pressure the USD if the budget bill fails to gather support.
- 02Ongoing tax cuts without new spending measures raise concerns over the sustainability of US fiscal health.
- 03Potential credit rating adjustments could influence risk sentiment in the FX market.
- 04Traders should watch congressional updates closely for any changes that could affect the dollar's trajectory.
Market implications
Watch the USD/EUR pair closely, particularly the 1.075 level as a potential support zone; any negative legislative news on the budget could see the dollar weaken beyond this range. Strong positions from **jpmorgan** indicate a bullish sentiment that could benefit from a clarity in fiscal measures.
Risks to this view
If the budget proposal drastically alters to favor significant new spending, this could bolster growth projections and reassess market confidence—potentially reversing the current bearish sentiment on the USD. Additionally, any unfavorable announcements concerning the US credit rating would heighten investor anxiety.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's six o'clock in the morning London time on Thursday the 22nd of May. US President Trump has labelled the Budget Bill currently before Congress a big, beautiful bill.
While the alliteration is, of course, to be applauded, having something that is a treble B bill might turn out to be unfortunate at a time when the US credit rating and general fiscal position is being questioned by the markets. Treble B might turn out to be the direction of travel. As of now, the bill has not passed Congress with last minute changes still being put in.
This makes the precise effect of the bill hard to judge because, of course, legislators have not had time to examine the consequences of what they are planning to do. And so economists cannot be expected to get to grips with the ever-changing nuances of concessions designed to win necessary congressional votes. However, the broad thrust is that this will put the United States on a path to a less sustainable fiscal position, and the tweaks and concessions are not going to change that.
The bond market is less than happy with this. Because a large part of the bill is continuing tax cuts that were otherwise due to expire, that element maintains the deficit without offering any stimulus for growth. It's only new fiscal action that changes the growth picture.
New cuts to health spending and food aid spending are in new initiatives and will slow growth. Eliminating taxes on tips are new initiatives and should stimulate growth. The long-promised cut in taxes on tips may generate an interesting side effect in that it could potentially push inflation higher than is actually reported.
Of itself, this change is an incentive for firms to pay staff less and to encourage tipping. But wages paid to staff are part of the price that consumers pay, recorded in the data. Tips are not captured in consumer price data.
So if tipping takes over from pay, inflation numbers will not be as high as the actual cost of living faced by ordinary US households. There is a cluster of central bank activity today that markets are likely to give some attention to. We get the account of the last ECB meeting.
Markets are very comfortable with the idea of the ECB steadily cutting interest rates, so this should confirm the easing stance. Of course, discussions around US trade taxes and their impact on the EU economy are going to be of interest. The Bank of England has three speakers, including Chief Economist Pill, who has already signalled discomfort at the pace of easing in the United Kingdom.
While yesterday's UK inflation figures were not unduly alarming, the divided nature of the Bank of England's policy decision-making means that any member of the MPC's comments is going to be of some note. Finally, there are three Fed speakers, including New York Fed President Williams. The Fed is dealing with a mass of uncertainty, and so statements of conviction are not to be expected.
But biases within that uncertainty are notable. For data, there's just a raft of business sentiment opinion polls, which are not really worth getting excited about. There's not a strong consensus view on this sort of data, estimates are tending to be quite scattered, and partisan bias and swings in the news cycle reduce the information content of these numbers.
That's all for today, have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. Its subsidiaries, or affiliates, collectively referred to as UBS.
In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. This material is for your information only, and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product.
The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS. Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story