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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
The desk interprets recent comments from US President Trump regarding increased tariffs on EU products as a reflection of ongoing policy uncertainty that could impact transatlantic trade dynamics. As outlined in the UBS commentary by Paul Donovan, while markets may initially brush off such threats due to Trump's historical volatility on trade issues, the implications for trade flows and supply chains remain serious, particularly if US manufacturers react by raising prices instead of pursuing market share. This environment adds complexity to the outlook for the European economy, especially following a better-than-expected first quarter GDP report from Germany, which highlights a pattern of initial data underestimating the economic strength in the region. Per the full note source, this context suggests that investor perception may be overly negative compared to the underlying reality of the German economy.
The desk believes that heightened trade tensions between the US and EU create a significant layer of risk for currency markets, especially regarding the EUR/USD pair. The commentary implies that while tariffs could potentially harm European exports, the actual impact may be contingent on how US firms choose to react — raising prices could limit the negative hit to Europe's real economy.
Supporting this view, Donovan mentions that the final German first quarter GDP was stronger than anticipated, indicating that markets may be underestimating the resilience of the German economy. This reinforces the idea of a potential disconnect between subjective market sentiment and objective economic realities.
Our current target for EUR/USD is 1.075, with a range established between 1.04 and 1.12. Within this range, jpmorgan has set a target of 1.10 for March 2026, while bofa sees a lower target at 1.04 for the same tenor. This places the desk's view slightly above the lower bound of the consensus spread.
Firms aligned with a bullish stance on EUR include jpmorgan, which projects continued support for a stronger Euro amidst these developments, and citi, which concurs with optimistic outlooks based on European resilience. On the contrary, bofa expresses concern, advising caution given the potential for trade tensions to escalate.
The trajectory of the EUR/USD pair will closely mirror decisions from the European Central Bank as it navigates this complex trade landscape, alongside data pending market releases that could further influence these dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should watch the EUR/USD level around 1.075, as fluctuations could signal reactions to trade rhetoric from the US administration. Key corporate earnings and economic data reports coming out of Germany will further influence market sentiment in the near term.
Risks to this view
A sharp escalation in trade tensions that prompts a significant and sustained increase in US tariffs could weaken investor confidence, leading to a bearish shift in EUR/USD. Additionally, if US manufacturers pivot toward aggressive pricing strategies in response to tariffs, the resultant economic fallout could dampen European export growth.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 23rd of May. Comments from the administration suggest that US President Trump is threatening to tax US consumers of European-made goods more aggressively if the EU does not unilaterally cut trade taxes on US products.
Given the number of times Trump has retreated on these sort of threats, markets are likely to place only a limited amount of weight on this stance, but it is a reminder of the policy uncertainty that persists in the United States at the moment. The last major tax retreat is time-limited to 90 days and even a brief return to aggressive US taxes would be disruptive for transatlantic supply chains. The European economy is affected by the trade dispute with the United States, of course, but the extent of the damage also depends upon the behaviour of US manufacturers.
If US firms choose to respond to trade taxes by raising their prices and going for profit share rather than market share, then the impact on the European real economy is substantially more muted. In that case, it would only be the general economic slowdown in the States resulting from Trump's policies that would be a drag on European activity, as exports to the United States would not be at any relative price disadvantage. Final German first quarter GDP was released stronger than had been expected, with positive revisions to the historical position of German consumers.
This actually represents an ongoing problem with German economic data. There is a tendency, at least, for initial German data releases to be too pessimistic. The German economy always tends to do better than first reported, but it is the initial data release that tends to set the narrative, and so investors tend to have a more negative perception about the German economy than the economic reality actually merits.
UK retail sales were stronger than expected in April. The data does adjust for the effects of inflation. There was unusually good weather, and of course the movable timing of Easter always complicates retail sales at around this period.
There were some downward adjustments to the March data as well. Nonetheless, the picture that is being presented is of a consumer and a retail sector that's performing relatively well. It's important to remember this, given the angst and general cries of despair that followed the UK budget last year.
There is, to date, little evidence of the dire predictions of the retail sector actually translating into anything at all in the real world. The US Supreme Court issued a carefully structured ruling about the ability of the US President to fire officials, specifically saying that the US Federal Reserve was not covered by the view that the President could fire whoever they chose. This was one of the more extreme fears of investors.
The great inflation moderation that has taken place globally in recent decades can almost exclusively be attributed to the independence of central bank policy. Threatening to politicise the US Federal Reserve is therefore obviously a concern. This ruling does not prevent Trump from trying to politicise the Federal Reserve in the future, as the President can nominate governors whenever the incumbents leave the Fed, but it is one area where the checks and balances do still seem to be operating in the US Constitution.
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.
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