UBS On-Air: Paul Donovan Daily Audio 'Dealing with the decidedly dull'
The resignation of European Central Bank President Christine Lagarde marks a critical juncture for the ECB, framed by Paul Donovan of UBS as a political maneuver rather than one dictated by economic acumen. With Lagarde's early departure now afoot, traders should brace for implications stemming from a successor chosen through political negotiations, potentially impacting ECB policies and market sentiment moving forward. Inflation readings from the Eurozone are expected to rise, reflecting ongoing pressures from energy prices, which could further inform the ECB's future direction. Per the full note , today's GDP data will be pivotal in evaluating economic resilience amidst these developments.
What the desk is arguing
Lagarde's early resignation from the ECB has raised questions regarding the stability of monetary policies in the Eurozone, as her successor may not be chosen based on merit. This situation, according to the UBS note, suggests future policy directions could be influenced by political rather than economic considerations, thus affecting overall market dynamics.
The upcoming economic data, including inflation figures, are critical as they are anticipated to reflect rising trends, primarily due to oil price impacts. Analysts must pay close attention to these indicators to gauge potential shifts in ECB policy that could result from rising inflation, particularly focusing on the Eurozone's unique inflation calculation methods that differ from the US.
Where it sits in our coverage
Currently, our consensus target for EUR/USD stands at 1.075, with a range from 1.04 to 1.12. Specific Dec-26 targets include: - jpmorgan: 1.10 - bofa: 1.04
This perspective aligns with the cross-firm consensus that suggests a moderated bullish scenario for the euro, indicating potential upward movement toward the 1.10 mark, which sits at the upper limit of the current range.
How other firms see it
Aligned firms, such as jpmorgan, share a bullish sentiment regarding the euro's trajectory, while bofa presents a contrary view, advocating for a lower outlook. In examining related currency pairs, it is wise to consider how these dynamics may play out with major economic indicators such as inflation rates and GDP growth affecting the ECB's policy-setting position.
What the calendar says
With upcoming Eurozone GDP data on the horizon, traders should prepare for significant market reactions from the figures that could clarify the overarching economic landscape ahead of the ECB's policy evaluations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lagarde's resignation is politically motivated, signaling potential shifts at the ECB.
- 02Rising inflation in the Eurozone suggests ongoing pressures that could impact ECB policies.
- 03Upcoming GDP data is critical for understanding economic resilience and ECB guidance.
- 04The market consensus leans toward a moderated recovery in the euro against the dollar.
Market implications
Traders should watch the 1.075 level closely, as surpassing it may indicate broader bullish sentiment across the Eurozone. The upcoming GDP release will be vital in determining market responses to Lagarde's departure and its broader implications for monetary policy.
Risks to this view
A notable risk to this outlook would be a marked deterioration in economic data, particularly if GDP figures suggest a deeper economic slowdown than expected, directly undermining the euro's strength and any short-term bullish sentiment.
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 30th of October. European Central Bank President and book author Lagarde's decision to resign early from leading the central bank has been widely anticipated, although the timing has always been uncertain.
For markets, it is not quite a non-event, but almost. The European Central Bank's governing council is so unwieldy that the leadership of the bank has had to have disproportionate influence. And the fact that Lagarde is not an economist denied the bank a critical facet of that leadership during their term.
There was no revolutionary shift in economic analysis, in spite of the very rapidly changing outside world. But Lagarde's successor is not going to be determined by aptness for the role. Instead, an economist with an interest in the next EDCB leadership must don a gas mask and enter the smoke-filled back rooms where political horse-trading is done.
Personal interest, not personal competence, will dictate the next ECB leader, though unlike some other central banks, there may be a minimum requirement with regards to the personal competence. After yesterday's unchanged policy decision from the ECB, we have even more economic data from the euro components today. The various inflation figures are likely to show an increase as the effects of oil price increases filter through.
Unlike the United States, diesel prices are a direct part of the European inflation calculation, although of course the same indirect effects will also be in evidence in the pricing over a longer period of time. We'll also get some GDP data from the major economies. There may be a temptation to try and offer direct comparison to yesterday's US GDP figures.
But there are two key issues with regard to this. First, of course, is demographics. Italy and Germany now have falling populations.
Fewer people working lowers the headline growth rate automatically. Second is the question of distribution. Most US households, perhaps 95% of US households, live in a European-style economy measured by GDP growth per person.
And it's probably a mid-ranking European economy at that. This matters when investors are thinking about where markets for products are likely to emerge. The Bank of Japan completed the policymaker's frenzy this week by leaving rates unchanged, although the bank did offer to alter the pace of asset sales next year, and also declared that Japan had met a sustained 2% inflation target.
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