UBS On-Air: Paul Donovan Daily Audio 'Less urgency on US cuts?'
The desk interprets the Federal Reserve's recent decision to maintain interest rates as a tactical shift towards a more hawkish stance, despite future cuts still being on the table. Per the full note from UBS, persistent economic growth has diminished the immediacy of rate reductions, indicating that any future cuts may serve as insurance against potential economic downturns rather than as direct stimuli. Current market sentiment reflects a weakened US dollar, particularly in light of ongoing uncertainties in the labor market and external geopolitical pressures, such as those stemming from trade policies. In this environment, traders should remain vigilant as the Fed's deliberations on monetary policy are likely to influence dollar dynamics significantly.
What the desk is arguing
The desk frames this as a signaling effect from the Fed, where the unchanged rate reflects confidence in current economic conditions, rather than a slow approach toward easing policy. This nuanced view posited by Paul Donovan highlights that while a rate cut remains probable later in the year, it will primarily act as a buffer against developing adverse conditions rather than a kickstarter for growth.
Supporting Donovan's perspective, the recent commentary underscores the importance of consumer confidence, especially as households adjust their savings in response to tariffs and economic uncertainties. According to UBS, the Fed's challenge lies in responding to shifts in consumer sentiment before they become acute, indicating the need for pre-emptive measures that align with their dual mandate of maximizing employment and stabilizing prices.
Where it sits in our coverage
Our consensus target for the USD/EUR pair is set at 1.075, with a range reflecting expectations of 1.04 to 1.12. Notably, several firms hold contrasting views: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
The desk's viewpoint aligns closely with jpmorgan, positioning at the upper end of the consensus range, contrasting against bofa, which maintains a more bearish stance on the dollar’s prospects due to ongoing concerns over economic fundamentals.
How other firms see it
Firms such as goldman and citi maintain neutral to slightly bullish perspectives on the USD, showing alignment with the Fed's cautious approach to easing. On the other hand, barclays is distinctly bearish, anticipating further downward pressure on the dollar amid global economic uncertainties affecting US competitiveness.
As the Fed's commentary moves forward, the trajectory of USD/JPY will become crucial, particularly as geopolitical events and labor market changes surface, potentially impacting the Fed's policy approach.
What the calendar says
With no significant monetary events anticipated over the next 30 days, market participants should focus on Fed commentary and labor market reports as catalysts for potential shifts in the dollar’s trajectory, particularly ahead of any unexpected economic data releases.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed's current stance suggests reduced urgency for rate cuts amid ongoing economic growth.
- 02Future rate cuts may serve as insurance against risks rather than direct economic stimulus.
- 03The US dollar is experiencing weakness yet remains stable against major currencies.
- 04Consumer confidence is pivotal for maintaining economic stability without rapid behavior shifts.
Market implications
Traders should watch the USD/EUR levels closely, particularly around the 1.075 target, as any shifts in Fed policy could catalyze moves above or below this threshold. Geopolitical developments and labor market fluctuations could drive sentiment in the short term, necessitating a reassessment of positions.
Risks to this view
Should labor market indicators show significant weakness or consumer sentiment dip sharply, the Fed may pivot more rapidly towards rate cuts, leading to a swift USD depreciation. Additionally, unexpected geopolitical events could impact market perceptions of dollar stability.
Good morning, this is Paul Donovan, Chief Economist at UPS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 29th of January. The US Federal Reserve left rates unchanged, but the tenor of the meeting was perhaps a little more hawkish.
Stronger growth seems to have lessened the urgency of a case for rate cuts. Investors are still expecting a cut this year, and that does seem to be appropriate. The US labour market is okay, but there are risks, and the problem here is that as US consumers need to cut savings to be able to afford the tariffs, job security is going to be very important in that process.
If consumers remain confident in their employment all is well, but it may very well be that at some point an insurance rate cut is required. That would not be to stimulate the economy, but to prevent a downside risk. The challenge for the Fed is that if the consumer does start to worry about job security, the change in behaviour is likely to be too rapid for the Fed to reverse.
So insurance rather than reaction is required. The US dollar is remaining weak, but at least against the major alternatives is not getting substantially weaker. There is something of a frenzy in precious metals still, but that doesn't necessarily have the characteristics of a rational reallocation.
The dollar's failure to strengthen comes in spite of US Treasury Secretary Besant doing damage control and declaring support for a strong dollar policy. The problem here is that many, many US Treasury Secretaries have talked about a strong dollar policy and even when an administration's economic policies have credibility, that statement is rarely taken too seriously by the markets. US President Trump's sabre-rattling against Iran over social media might be supposed to be something that would help the dollar, but Trump's venting on social media is increasingly being ignored by investors and Iran is not seen as a major economic issue, whatever the political and humanitarian considerations.
Europe is relatively quiet today. There are some sentiment numbers that can be ignored with confidence. There's also M3 money supply data.
M3 is not market moving, but that doesn't stop it being interesting. There was a very aggressive draining of liquidity in 2023 and 2024 with negative or very low money supply growth. Now money supply is growing around 3% and seems to have stabilised at around that level of growth.
This is noticeably below the pre-pandemic norms. It might be a result of shifting liquidity preference in a world that has moved more online, but M3 is broad enough that it should be able to capture such changes. It does rather emphasise why the ECB is consent to consider itself at a comfortably neutral position.
The United States is offering trade data of relevance because it will affect GDP numbers, but it's still not really predictable because US importers have been changing things around to try and minimise the amount that they have to pay in tariffs. There are also factory orders data. There should be some gains in these numbers over time as the Biden-era factory building boom will have increased capacity in the United States over the course of the past year.
But it's very unlikely that the US will see a revival of its manufacturing to GDP ratio. That's all for today. Have a good day.
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