UBS On-Air: Paul Donovan Daily Audio 'Functioning government?'
The desk positions itself around the implications of continued political dysfunction in the U.S. government on FX markets, emphasizing a growing indifference from investors. Per the full note from UBS, the government shutdown's conclusion did not significantly affect market sentiment, illustrating a normalization of political gridlock. However, the ongoing resistance from Democrats against the confirmation of former Fed Governor Warsh as the next Fed Chair suggests potential for continued monetary policy stability, especially as Powell's leadership may extend beyond May. This backdrop indicates that U.S. dollar sentiments could remain subdued, particularly against a backdrop of improving Eurozone conditions.
What the desk is arguing
The current indifference to U.S. political dysfunction is leading the desk to focus on the strength of the euro area compared to its American counterpart. According to UBS's analysis, while the U.S. government faces a gridlock that raises concerns about governance, the Eurozone exhibits a solid foundation for growth. Investors should consider the implications of this disparity as it plays out in currency markets.
UBS highlights that the failure of the U.S. government to function has become routine, with investors focusing more on the resilience of the Eurozone. Recent data, such as the expected disinflation in Eurozone CPI to 1.7%, supports a stable outlook for euro zone consumption, further contributing to a positive growth narrative for the euro region relative to the U.S.
While the focus on Eurozone performance strengthens the bullish thesis on the euro, the alternative perspective—one which anticipates a rebound in the dollar driven by unexpected political or economic shifts—remains on the table but appears increasingly challenged given the current landscape.
Where it sits in our coverage
Our current consensus targets suggest a bullish view on the euro, with a target of 1.075 within a range of 1.04 to 1.12. Specific forecasts include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
The desk's position aligns closely with jpmorgan, which reflects a relatively optimistic view on the euro, suggesting that current political stability in Europe could bolster sentiment further. Conversely, bofa stands as a bearish outlier within the consensus, reflecting a more cautious outlook on the euro against the dollar.
How other firms see it
Most firms appear to share a favorable outlook toward the euro's performance against the dollar, with jpmorgan indicating a more robust target. However, bofa presents a contrarian stance, wary of potential U.S. recovery phases that could disrupt euro strength.
Key intersecting elements include the ECB's stance on monetary policy and the anticipated consumer behaviors within the Eurozone, as these factors are crucial in shaping the EUR/USD trajectory in the coming months.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Political dysfunction in the U.S. has become a norm, reducing market sensitivity to government shutdowns.
- 02Investors are more focused on economic data and growth signals from Europe, such as the anticipated decline in Eurozone CPI.
- 03The possibility of Powell continuing as Fed Chair indicates stability in U.S. policy, which could pressure the dollar.
- 04Eurozone economic resilience may attract investors, providing a stable foundation for potential upward movement in the euro.
Market implications
Traders should monitor the EUR/USD level around 1.075 as the upcoming economic data from the Eurozone, specifically inflation metrics, may further bolster this position. In the absence of U.S. political upheaval, expect euro strength to persist against the dollar's relative weakness.
Risks to this view
Any unexpected advancements in U.S. political unity leading to favorable legislation or significant economic indicators could negate the current bearish outlook on the dollar and support a stronger dollar position. Additionally, unexpected Fed policy changes could shift market dynamics rapidly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's two o'clock in the morning London time on Wednesday the 4th of February. U.S.
President Trump signed a bill ending the partial U.S. government shutdown. The failure of the U.S. government to operate has become so commonplace that this particular shutdown had not registered with markets beyond the fact that certain data releases were likely to be delayed, so the reopening is of relatively little interest. Of more concern to investors is the fact that there has been a united opposition by Democrats to confirming former U.S.
Federal Reserve Governor Walsh as the next Federal Reserve Chair because of the administration's ongoing legal pursuit of the Fed. This is a confirmation of what was previously supposed, but it does mean that it is perfectly possible that Fed Chair Powell continues as Chair of the FOMC beyond May. They cannot continue as Chair of the Board of Governors.
France's budget has passed into law without any necessity of government shutdown because the French government was not voted out in a vote of confidence. Again, this was expected by financial markets and it leaves France failing to resolve its fiscal imbalances, although of course the dynamics and scale of French debt are not so alarming as those of the United States. Eurozone flash estimates of the January consumer price inflation figures are expected to show disinflation, with the headline rate declining to a 1.7% year-on-year growth.
This is just reinforcing the neutral position that has been taken by the European Central Bank and the fact that real incomes are rising at a relatively comfortable pace in the euro area. It allows consumers to act as a solid foundation for euro area growth and it would probably take a lot more to disrupt the performance of the European consumer than it would to disrupt the U.S. consumer at this stage because the U.S. consumer is more dependent on their ability to access savings in order to pay for U.S. tariffs. Away from the fundamentals, the equity markets saw some disruption to technology stocks on speculation about what artificial intelligence may do as a disruptive force.
One of the problems with new technologies is that the implications cannot be known with any great certainty and small shifts in assumptions can be magnified by expectations around the future. In geopolitics, a drone was shot down by the United States in the Gulf, but talks with Iran are apparently still scheduled. Economists have been, if not indifferent, largely disinterested in these events.
The oil price has not been reacting in an economically meaningful way and that is containing the damage. That's all for today. Have a good day.
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