UBS On-Air: Paul Donovan Daily Audio 'I mean, nobody knows what I’m going to do'
In the wake of the Federal Reserve's decision to maintain interest rates, uncertainty surrounding U.S. trade policy portfolios amplifies a cautious outlook for the dollar. Per the full note from UBS's Paul Donovan, the Fed's reliance on a reactive, backward-looking stance risks timing issues in future policy responses amid evolving economic conditions. As the labor market remains a crucial indicator for potential Fed cuts, this status quo creates a landscape where traders need to be particularly alert to shifts in employment data and consumer behavior. Additionally, the upcoming Bank of England meeting adds another layer of complexity to the FX landscape, especially with noted dissent among MPC members which may lead to unexpected outcomes.
What the desk is arguing
The desk posits that the Fed's current approach of maintaining interest rates amid trade-related uncertainties will generate ongoing volatility in the dollar’s value. This stance underlines that the Fed's reactive policies may lead to delayed responses to worsening economic indicators—a sentiment echoed by Donovan's commentary.
Supporting this view is the precarious state of U.S. consumer confidence and spending, directly linked to trade tax implications. Market players should be aware that as uncertainty continuously weighs on investment and spending decisions, cyclical data such as employment figures may be the Fed’s ultimate trigger for rate adjustments.
Where it sits in our coverage
Our internal consensus targets for the USD reflect an average near 1.075 for the EUR/USD pair, within a range of 1.04 to 1.12. Notably, jpmorgan expects a 1.10 target as of March 2026, while bofa suggests a more conservative outlook at 1.04 for the same tenor.
This positioning underscores a concern among traders that our forecasts are likely aligned to the upper bound of the anticipated range, reflecting expectations that the Fed could pivot sooner than anticipated based on labor market developments.
How other firms see it
Among aligned firms, jpmorgan and several others foresee a weakening dollar amid persistent uncertainty, which contrasts with bofa’s more cautious, bearish outlook.
Key currency pairs to monitor alongside this narrative include GBP/USD, especially with the looming Bank of England meeting potentially influencing directional trades in response to the Fed's actions.
What the calendar says
As no high-impact events are scheduled in the next 30 days for this jurisdiction, traders should maintain vigilance in assessing upcoming labor market data, which will be pivotal for shaping Fed policy responses.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed's reluctance to adjust rates adds to uncertainty in U.S. trade policy.
- 02Labor market dynamics will be critical in informing any future rate cuts.
- 03Divergence exists among FX firms regarding EUR/USD projections, with caution urged.
- 04The upcoming BoE meeting may present additional volatility in FX markets.
Market implications
Focus on key support and resistance levels for EUR/USD, particularly observing how labor market data unfolds ahead of potential Fed shifts. The outcome of the BoE meeting could also have ripple effects across other currency pairs.
Risks to this view
The main risk to the desk’s view lies in unexpected economic data that surprises traders, potentially leading to a quicker-than-anticipated rate cut by the Fed. Should trade policies stabilize without negative repercussions, the dollar might regain strength abruptly.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 5.30 in the morning London time on Thursday the 19th of June. The US Federal Reserve surprised no one, at least no one who is a qualified economist, by leaving rates unchanged yesterday.
Uncertainty abounds in the US economy at the moment. How high will trade taxes go? How big will the second round effects be?
How much is uncertainty damaging investment? How much is uncertainty damaging employment? How much will consumers rely on savings and credit cards to pay trade taxes or will they just cut back on spending?
Will cuts in government spending affect low income spending more than tax cuts boost high income spending? And so on and so on. As US President Trump said yesterday, albeit in a different context, quote, I mean nobody knows what I'm going to do.
That is a very simple summary of the Fed's policy dilemma. It reinforces the unfortunate data dependency concept because the Fed ends up defaulting to a backward-looking wait-and-see mode, which risks making policy decisions too late. Given that this is the Fed's reaction function, it will probably be the US labour market that pushes the Fed into cutting interest rates and the damage of uncertainty in trade taxes on the labour market is something that evolves relatively slowly.
We're not done with central bankers, for today it's the turn of the Bank of England. The bank at least offers a bit of drama in that its Monetary Policy Committee members have no qualms about disagreeing with the governor and offering dissenting voices. Challenge is a behaviour that improves the quality of decisions, something even chief economists are forced to concede from time to time.
This time, while the decision is very likely to be a split one, the economics profession has declared with one voice that there will be no change in rates. Markets have hopefully learned by now that when every economist agrees with every other economist, the answer is as certain as anything can be in this uncertain world. Rate cuts are likely in the coming quarters.
Yesterday's inflation data had some disinflation information in the details, but this will probably follow the quarter-point-to-quarter pace. As for Europe, there are plenty of central bank speakers today, including ECB President Lagarde. Markets are not likely to get too animated by any of this.
True, the oil price has moved a little higher in recent days, but this is hardly at a level which will have central bankers grasping in horror, and certainly not in the euro area. The Middle East situation adds a new layer of uncertainty for financial markets, with suggestions that the US is preparing to strike against Iran. Risks of military action are high in the coming days.
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