UBS On-Air: Paul Donovan Daily Audio 'Cutting confidence more than spending'
The desk interprets recent comments from ECB President Lagarde—pointing to heightened uncertainty surrounding inflation and interest rates—as indicative of a potential downward adjustment in ECB policy rates. This follows her confirmation of expectations for further cuts, echoing sentiment expressed by Paul Donovan of UBS, who cited that increased economic unpredictability could inhibit growth unless addressed. As such, market dynamics lean towards decreased rate aspirations which may amplify euro volatility against key pairs amidst poor data forecasts from the US. Following the full note source, traders should be cautious moving forward as developments from ECB speakers could provide incremental insights, albeit less likely to affect market consensus significantly at this juncture.
What the desk is arguing
The desk sees Lagarde's comments as a clear signal of potential shifts in ECB policy that may further decrease the euro's value. Per the full note source, she aptly highlights the ongoing inflation uncertainties and reinforced market expectations for rate reductions across Europe.
Supporting this view, the evolving economic landscape is characterized by US spending rising 7% year-over-year as of February, contrary to publicized spending cuts, indicating potential strains on market sentiment. The upcoming US producer price inflation data could further illuminate these dynamics, spotlighting inflation trends that investors are closely monitoring.
Where it sits in our coverage
The consensus target from our coverage for EUR/USD reflects a price of 1.075, highlighting a range between 1.04 and 1.12. Notable targets among firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's outlook aligns closely with jpmorgan, settling towards the higher end of current expectations, as other forecasts indicate potential pressure from contrary views such as those from bofa.
How other firms see it
Broadly, firms like jpmorgan and deutsche, which foresee a weakening euro, align with the desk's outlook on the ECB's potential policy shifts. Conversely, bofa holds a bearish stance anticipating a stronger dollar amidst challenges in the EU monetary framework.
Traders should keep an eye on the EUR/USD trajectory, which closely mirrors ECB rate decisions, especially considering anticipated unemployment data forthcoming from the US, which may influence overall market directions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lagarde’s commentary suggests increased uncertainty in ECB's inflation outlook.
- 02US inflation data may continue to impact market sentiment and currencies.
- 03Current consensus targets indicate potential volatility in EUR/USD.
- 04Predicted ECB rate cuts could bolster bearish sentiments towards the euro.
Market implications
Traders should monitor the reaction of EUR/USD around the 1.075 level as further ECB commentary emerges. The upcoming producer price inflation data from the US on the 14th could also serve as a catalyst for shifts in market positioning.
Risks to this view
A surprising uptick in US consumer or producer prices might invalidate the bearish call on the euro. Additionally, stronger-than-expected ECB notes suggesting rate stability could also pressure the EUR/USD pair higher.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning, London time, on Thursday the 13th of March. From time to time, it is possible that this morning audio comment might have been interpreted as being critical of the fact that ECB President Lagarde is not an economist.
However, in remarks yesterday, Lagarde did achieve a very good impersonation of an economist, saying, basically, that inflation could go up, or it could go down. That is indeed true. Lagarde was highlighting the uncertainty that has been the hallmark of 2025, but within their remarks also suggested that the direction of travel for European rates was unchanged, essentially confirming market views of more rate cuts.
Today, we have no fewer than seven ECB speakers jostling one another for media attention. It is unlikely that any of their comments will significantly alter market expectations. Quite a lot of the world's uncertainty stems from the erratic policies of US President Trump.
There have been suggestions from the US administration that the economic disruption is a cost that must be paid to achieve long-term economic benefits. But as now the balance is tilted more towards cost and less towards benefits, that is a challenging situation. In contrast to claims of cuts to government spending, US spending rose 7% in February compared to last year.
The risk is that media attention on reported cuts and on the inefficiencies resulting from a rather haphazard set of job losses may amplify the negative economic consequences by depressing what economists refer to as animal spirits, without there being a noticeable benefit in terms of reduced spending. Today, the US releases February producer price inflation data, which comes in the wake of yesterday's slightly lower-than-expected consumer price inflation figures. As with the consumer price inflation, today's data is very unlikely to show the effects of trade taxes.
These will probably not have affected prices in time for the data survey for the producer price numbers. Indeed, because of existing contracts and stockpiles, it can take a couple of months or more for trade taxes to push up US prices. Obviously, a tax on something like Mexican avocados would have filtered through to prices a lot more quickly than will the effect of steel taxes on US car prices, and it is the areas where taxes are most visible and filter through most quickly that have generally seen the fastest retreats from trade-to-tax impositions.
The further increase in egg price inflation is an internet meme, but that makes it more of a political focus. Producer prices are generally a better reflection of corporate pricing power, as most companies sell to other companies, so the figures today are worth paying attention to. One of the uncertainties around the impact of trade taxes is how easily companies find it to pass the tax along down the supply chain, ultimately to the end retail consumer.
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