UBS On-Air: Paul Donovan Daily Audio 'Low value inflation'
The desk interprets the recent commentary from UBS's Paul Donovan regarding inflation data from Germany and France as largely inconsequential to market expectations for the euro area. Donovan highlights that while German inflation is expected to moderate due to technical factors, such as a reduction in the weighting of package holidays, there is no underlying inflation threat that would compel action from the European Central Bank (ECB). As per the full note, this indicates that the ECB is likely to maintain its stance of 'masterful inactivity' this year, potentially dampening volatility in EUR pairs as the released inflation figures offer little to reshape forecasts.
What the desk is arguing
The desk suggests that recent inflation data from Germany and France is not expected to influence market sentiment significantly. Donovan notes that the moderation in German inflation figures is primarily technical and does not signal broader inflationary pressures in the euro area, reinforcing the ECB’s likely wait-and-see approach this year.
Supporting this view, Donovan references the lower impact of package holidays on German inflation, suggesting overall consumer price stability in both countries. This implies that traders can expect limited impact on the euro unless there are substantial shifts in broader economic indicators or ECB policy directions.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12 for December 2026 as per recent forecasts from relevant firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns closely with the central consensus, echoing the sentiment observed across other market participants, particularly in light of expected steady ECB policy.
How other firms see it
Firms such as jpmorgan and barclays share a similar outlook, anticipating a stable EUR with limited upward movement for the near term. Conversely, bofa presents a more cautious perspective, projecting deeper downside risk.
In this context, movements in EUR/USD could reflect shifts in U.S. Federal Reserve policy, especially if inflation readings in the U.S. diverge significantly from European trends. Market participants should closely monitor the interactions of these central bank policies as they influence euro exchange rates.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German and French inflation data are not expected to influence EUR markets significantly.
- 02ECB is likely to maintain a stable policy stance, reflecting low inflation pressures.
- 03Focus remains on technical factors affecting inflation, such as the weighting of package holidays.
Market implications
Traders should watch inflation dynamics and ECB signals closely, particularly the EUR/USD pair's movements around the 1.075 mark. Any shifts in U.S. inflation data could complicate the outlook, offering potential volatility.
Risks to this view
A significant upward surprise in inflation figures or unexpected shifts in ECB policy could invalidate the current call, signaling a reevaluation of EUR strength in the coming months.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday the 6th of January. Today we get the release of French and German preliminary consumer price inflation data for December.
This is, to be honest, not of a great deal of interest in and of itself. Europe doesn't face a particular inflation threat, and away from the machinations of government-controlled prices there's no wonder lying inflation pressure is particularly evident. This is why the European Central Bank is expected to engage in masterful inactivity as far as monetary policy is concerned this year.
The ECB is very good at doing nothing. It's when it tries to do something that economists get nervous. German headline inflation should moderate fairly significantly, but this is mainly due to technical factors, lowering the weighting of package holidays, which would typically push up inflation towards the end of the year.
While the trend towards spending on having fun continues across most developed economies, it would seem that a package holiday is no longer automatically considered to fall into the fun category. The European inflation data is therefore not going to shape market expectations about the euro area. There may be some benefits when we get the updated numbers, not because the headlines are going to change, but because economists toiling away in their dark basement offices can learn things by comparing details within inflation figures.
Thus, the fact that German banana prices are lower than they were in March, but US banana prices are notably higher than they were in March, or that washing machine prices in the euro area have fallen this year while they've risen in the United States, are useful information points about the impact of US policies and the tendencies towards retailer profit-led inflation in the States. In other words, today's European data is not necessarily very important, but the future release of details from today's data will serve as a helpful benchmark for assessing policy impacts elsewhere in the world. The UK also offers some inflation hints with the British Retail Consortium's Shop Price Index for December.
This misses out most of what goes into consumer price inflation, of course, and in the retail sector itself, the real world shopping has had declining relevance, especially around Christmas time. The British shop online. Non-food prices continue in deflation, as they've been for actually a very long time.
Food prices rose after a couple of months where dish inflation forces have been more significant. The UK consumer does have spending power, and that may have emboldened some price increases from food retailers, or at least fewer discounts than one would expect at the end of the year. Claims that government policy is driving inflation higher are somewhat undermined by the ongoing deflation of the non-food sector, which does, after all, face exactly the same policy environment.
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