UBS On-Air: Paul Donovan Daily Audio 'Domestic demand drivers'
The desk anticipates that the ongoing uncertainty surrounding the nomination process for the next Federal Reserve Chair will lead to an increase in volatility within major currency pairs, particularly EUR/USD, GBP/USD, and USD/JPY. Per the full note from UBS, the potential candidates for the role may lack the perceived independence from political pressures that past chairs had, impacting market confidence in future rate decisions. Current pricing reflects a complex landscape where trade policies and domestic demand are in flux, especially as the US grapples with potential import tax increases that could disrupt international trade. The desk highlights that the latest market consensus sees EUR/USD hovering around 1.1500, with targets for December 2026 varying significantly across institutions, amplifying the importance of upcoming economic data and Fed decisions.
What the desk is arguing
The desk posits that the nominees for the Federal Reserve's next governor, likely lacking political independence, could result in a hesitation among market participants regarding US monetary policy moving forward. The environment is further complicated by ongoing discussions about trade taxes and their potential economic implications, which add layers of uncertainty to domestic demand conditions, a crucial component for economic growth.
Data driven by political dynamics, like the TBD tariff structures in the US, coupled with the E.U.'s anticipated retail sales figures, could shift market sentiment. This backdrop might lead to increased volatility in EUR/USD, GBP/USD, and USD/JPY as traders navigate the implications of these developments.
Where it sits in our coverage
Current market pricing for EUR/USD sits at 1.1500, while the median consensus range for Dec-26 is significantly broad, with UBS projecting a target of 1.2000. Other notable firm targets for EUR/USD by Dec-26 include: - hsbc: 1.1800 - deutschebank: 1.2500 - goldman: 1.2000
The desk's bullish stance aligns with UBS's target at the high end of the spectrum, indicating a belief that the EUR/USD pair will rally despite prevailing headwinds.
How other firms see it
Among aligned views, firms like hsbc and deutschebank support a more optimistic outlook on EUR/USD, reinforcing the sentiment that potential Fed nominee characteristics may drive bullish trends. Conversely, firms like citi and mufg appear more cautious, suggesting a tempered view on EUR/USD moving forward.
Wider economic indicators, such as inflation metrics and central bank commentary from both the US Fed and the ECB, will be instrumental in shaping expectations for not just EUR/USD but also GBP/USD and USD/JPY trajectories as they respond to monetary policy shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Ongoing Fed nomination uncertainty could elevate volatility in FX markets.
- 02Potential tariffs outlined in US discussions may complicate trade and domestic demand.
- 03Current EUR/USD pricing around 1.1500 with broad institutional target variance underscores market hesitance.
- 04Consensus points towards a bullish tilt in our coverage, especially from firms like UBS and Deutschebank.
Market implications
Traders should closely monitor the 1.1500 level for EUR/USD; a decisive break above could signal a bullish trend aligning with UBS's projections. Furthermore, potential upcoming economic data releases regarding US retail sales and ECB commentary could influence market positioning ahead.
Risks to this view
A shift in the nomination towards a more politically aligned candidate could undermine current bullish sentiment in the currency markets, reversing trends if confidence in monetary policy independence wanes further. Additionally, an unexpected spike in inflation could precipitate aggressive rate actions from the Fed.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
MUFG | — | 1.2000 |
Citi | — | 1.1200 |
UOB | — | 1.1445 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 6th of August. The nominee for the next Governor of the US Federal Reserve and possibly the next Chair of the Board of Governors is apparently one of four people, none of whom a US Treasury Secretary Besant.
It seems unlikely that any of the potential candidates will be perceived as being truly politically independent in the style of Volcker, Greenspan, Bernanke or Yellen. The question is whether they will be so obviously a political puppet that the rest of the Federal Reserve rebels and refuses to follow their lead. Meanwhile, the seemingly random US process that produces trade taxes does not appear to have shut down entirely.
The hope was that while the latest tax burden would be economically damaging for the states, the accompanying damage of policy uncertainty would diminish and other scapegoats for poor economic performance in the states would be found. However, threats to tax imports from countries that are buyers of Russian oil have now been made. These layers of taxes do add an additional concern, namely that the bureaucracy required by the private sector to engage in international trade is now increasing.
It's no simple task for a US importer to calculate exactly what they would owe on imported goods and the whole process is further complicated by the possibility that some of these taxes will be declared to be illegal and any money paid would then have to be refunded. Time spent trying to plan for hard-to-calculate tax liabilities is not especially efficient. Over in Europe we will be getting June retail sales data.
This is not especially timely and the data itself is not likely to be market moving. However, the concept of domestic demand within the European area is important and very relevant. European trade is supported by the fact that outside of the United States the global trading system is functioning more or less normally.
But the domestic demand narrative was always going to be very important to the European growth story this year. Of course, the pivot to spending on fun rather than spending on goods is a lasting drag on this specific statistic, but nevertheless the market consensus is for some growth this month. German factory orders data for June fell on the month against expectations for a rise.
However, there is a better than 50-50 chance that the data will be revised stronger on the evidence of factory orders numbers released so far this year. The previous month's data was, indeed, revised stronger. In Japan, wage growth for June was disappointing and it remains negative in real terms, albeit the previous month's data was revised to be somewhat less negative.
Sources & References
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