UBS On-Air: Paul Donovan Daily Audio 'Little of substance'
The US-Iran negotiations remain stalled, with Vice President Vance denying being the scapegoat for current tensions, while market participants anticipate an extension of the ceasefire and cautiously track oil supply dynamics. Per the full note source, the current ceasefire of 60 days might require extension, echoing the extended negotiations observed during President Obama's tenure. Notably, Kuwaiti oil production is expected to ramp up, contributing to market optimism despite geopolitical uncertainties. This is amid a backdrop of robust UK retail sales, suggesting consumer resilience, despite possible political shifts. The current sentiment reflects that of traders who remain hopeful without a clear signal from the overarching geopolitical climate.
What the desk is arguing
The desk frames this as a continuation of cautious optimism in markets regarding the US-Iran situation, where the absence of concrete negotiations may hinder progress, but the overall sentiment leans positive. This is underscored by data that suggests a stronger UK consumer sentiment as suggested by recent retail sales figures surpassing expectations, emphasizing that growth might be more underpinned by genuine demand rather than inflationary pressures. In the context of oil supply, Kuwaiti intentions to ramp production are likely to further buoy market sentiment, injecting liquidity into a potentially tense environment.
US retail sales figures have been notably weaker than their UK counterparts, with the UK enjoying a strong run that contrasts with a muted US outlook. The latest retail sales data for the UK showed a month-over-month increase of 1.4% in May, significantly outperforming expectations and suggesting a resurgence in consumer confidence.
Where it sits in our coverage
Currently, our consensus target for the GBP/USD is set at 1.075, establishing a narrow trading range in light of recent market movements. The following firms provide specific forecasts within this spectrum: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s viewpoint aligns closely with jpmorgan, which also expresses a bullish outlook for GBP at the higher end of the range, reflecting an optimistic stance amid the mixed UK economic signals, while bofa adopts a more cautious position, aligning at the lower end of the target range.
How other firms see it
Firms such as jpmorgan and citi echo a bullish sentiment towards GBP, possibly viewing an extended ceasefire and strong retail data as positive developments. In contrast, bofa maintains a more conservative perspective, possibly influenced by geopolitical risks impacting currency performance.
Traders should keep an eye on the interplay between GBP/USD dynamics and broader indicators like US CPI and BoE decisions, as changes could significantly influence sentiment amid the current geopolitical landscape.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-Iran negotiations are stalled, with expectations of an extended ceasefire.
- 02UK retail sales data indicate growth driven by genuine consumer demand rather than inflation.
- 03Kuwaiti oil production plans may lead to improved market sentiment.
- 04Political developments in the UK are unlikely to shift consumer outlook substantially.
Market implications
Monitor GBP/USD towards the consensus target of 1.075, particularly how it may react to ongoing geopolitical developments and Kuwaiti oil output projections. A break above 1.10 could indicate a shift in sentiment favoring GBP in the face of improving economic data.
Risks to this view
A reversal in market sentiment could occur if geopolitical tensions escalate, particularly if US-Iran negotiations take a turn for the worse, which could exert downward pressure on GBP. Additionally, any significant drops in retail sales figures could also impact projections.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 19th of June. Yesterday US President Vance denied being set up as the fall guy to take the blame for the proposed deal between Iran and the United States, but has decided not to fly to Switzerland for talks just yet.
In theory the 60 days of ceasefire are already underway, but the recent precedent, not to mention the two years it took to negotiate the Iranian deal struck by US President Obama, suggests that there may have to be some extension of that 60 day deadline. Markets are primarily concerned about the speed with which the Strait of Hormuz reopens and are much less concerned about who takes the blame for the position the US finds itself in, although there may be some very faint longer term market relevance around any impact on the 2028 US presidential race. Kuwait has talked about ramping up oil production close to pre-war levels very quickly and ships are slowly getting through Hormuz, which should keep the markets happy in their bias to look on the bright side of life.
The UK consumer also seems inclined to look on the bright side of life, or at least act that way. May retail sales were strong, indeed very strong, and as these adjust for the inflation effect, unlike the US equivalent data, this is a genuine desire to go out and buy more stuff, not a price effect arising from the war. Indeed, retail sales in the UK have tended to outperform expectations quite noticeably over the course of this year.
Warm weather was being cited as a reason for some of the more recent strength. Will UK politics change the UK consumer's outlook? It seems relatively unlikely that UK politics will change anything of substance.
It might change the Prime Minister, but nothing of substance. The Mayor of Manchester, Burnham, won a by-election that will allow a challenge to Prime Minister Starmer to take place. Burnham would probably, though not inevitably, win that challenge.
The sizable victory of the by-election and the defeat of the far-right Reform Party is indicative of the extent to which tactical voting is likely to be a feature of future UK elections. That makes future election outcomes a lot harder to predict. However, significant policy shifts, at least in the areas that financial markets care about, seem relatively unlikely in the near term.
There's been a certain amount of inflation data out around the world. Japan's May national consumer price inflation was benign and in line with expectations. With the Bank of Japan having raised rates already, this number was perhaps a little bit less of a focus, though there is still uncertainty about the timing of the next rate increase.
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