UBS On-Air: Paul Donovan Daily Audio 'Carrying on, without keeping calm'
The desk interprets recent commentary from UBS, indicating a growing concern within the ECB about inflationary pressures due to oil prices, despite a lack of empirical evidence supporting broadening inflationary trends. Per the full note source, UBS highlights that current inflationary dynamics hinge more on wage or profit-led inflation, both of which remain absent. As a result, the likelihood of additional rate hikes looms, potentially impacting Eurozone currency pairs. Without significant shifts in wage growth or profit margins, traders may want to proceed cautiously.
What the desk is arguing
The desk posits that the ECB's rhetoric, as noted by UBS, reflects underlying tensions regarding inflation management in light of recent oil price increases. While these pressures are acknowledged, UBS argues there's insufficient evidence suggesting non-oil inflation drivers are at play, which could mitigate the likelihood of aggressive policy responses.
This assessment aligns with the ECB's fixation on monetary discipline, as UBS indicates a possible need for further rate increases should inflationary narratives persist. The desk notes that any shifts in this regard could alter market dynamics, particularly for the Euro against major currencies.
Where it sits in our coverage
The desk notes that our consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Notably, several firms have varying targets: - jpmorgan - 1.10 (Mar26) - bofa - 1.04 (Mar26)
The desk's assessment aligns closely with the upper end of the consensus range, suggesting a potential for further strengthening of the Euro against the USD if signs of broadening inflation fail to materialize.
How other firms see it
Several firms, including jpmorgan and deutsche, share a similar outlook on inflation risks and potential ECB actions. Conversely, bofa diverges, projecting a more cautious stance on the Euro amidst price pressures.
Traders may want to monitor the EUR/USD trajectory, particularly as it may reflect the ECB's rate path moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UBS reports no evidence of oil price pressures broadening in the Eurozone
- 02Potential ECB rate increases may loom without clear inflation drivers
- 03Different firm outlooks indicate a divergence in Euro forecasts
Market implications
Watch for EUR/USD levels around 1.075, as this could be a pivotal point depending on future ECB communications on inflation. Additional insights into inflation data could shift trader positioning significantly.
Risks to this view
Should inflation indicators begin showing signs of wage growth or profit-related pressures, the current Euro bullish stance may quickly reverse. Any unexpected policy adjustments from the ECB would also challenge the desk's outlook.
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 12th of June. Yesterday's European Central Bank policy error was accompanied by some rather weak justification.
Talk of the oil inflation shock broadening out is, to use a technical economic term, nonsense. Non-oil prices will rise as oil input costs are passed through, but there's no evidence of anything other than a mere pass-through of oil costs into consumer prices. Wages remain modest in terms of growth and profit-led inflation has not yet appeared.
Today's final May inflation data from Germany and Spain is not going to be a market focus, but the details should confirm there's no broadening of inflation pressures in Europe. Nonetheless, the rhetoric and the general sense of a Teutonic cry of, we must have discipline, echoing throughout the ECB, suggests that the error may well be compounded with a second unnecessary rate increase. The European Central Bank's NAGL is already suggesting a desire to make things worse with a July rate hike.
Meanwhile, US President Trump has declared, for what media report to be the 39th time, that agreement with Iran is just around the corner. Iran's media is suggesting the United States has accepted Iranian proposals for an agreement and that increases credibility amongst investors as to the prospect of a settlement of some kind. However, much of the current market reaction may simply reflect Trump backing down from further missile strikes against Iran, which is an obvious de-escalation of the situation, at least for the near term.
The Strait of Hormuz remains effectively shut, so market reactions can only be about expectations at this stage. June US-Michigan consumer sentiment data is, of course, meaningless noise, but the partisan breakdown of inflation expectations is probably worth a glance. Only a tiny number of people actually give their opinions in this poll, but the persistence of political polarisation is indicative of the challenges of survey evidence.
Where polls like this do matter is the extent to which politicians take them seriously. Other polls have suggested a majority of Republican voters now blame Trump for the affordability crisis in the States, and that is a pressure that may manifest itself in things like the Iranian policy and the potential of a tariff policy in the future. The UK did a quick data dump of activity-related information.
The pattern is following global trends in that the manufacturing data came in stronger than expected, with a boost from specifically computer-related production. That's all for today. Have a good day. ...and a member of FINRA SIPC.
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