UBS On-Air: Paul Donovan Daily Audio 'Murky situations'
The desk interprets recent comments from US Treasury Secretary Bessent, who expressed confidence in Federal Reserve Chair Warsh's ability to manage inflation, potentially signaling a more hawkish stance from the Fed. This endorsement is particularly notable given Warsh's previous denial of being a "sock puppet" for President Trump, which raises questions about the independence of the Fed amidst current economic pressures (Per the full note source). While inflation is expected to decrease as tariff effects fade, the desk remains cautious about long-term price stability. The current USD strength against the EUR and JPY, along with upcoming ECB communications, may create volatility in these currency pairs.
What the desk is arguing
The desk frames this as a critical juncture where Warsh's credibility and the Fed's operational independence are under scrutiny due to recent political endorsements. Although inflation figures might decrease naturally, the desk highlights potential market reactions to any further hawkish statements from the Fed.
As inflationary pressures continue to wane, particularly from tariffs and energy prices, markets could react strongly to any ECB hawkish turns as well. A crucial observation is that oil price influences on inflation, given recent geopolitical tensions, may still play a role in shaping future trajectories.
Where it sits in our coverage
For EUR/USD, our current spot is 1.1500, with a consensus target of 1.1840 by June 2026, and various firms holding differing outlooks: - ubs: Mar26 1.2000, Dec26 1.2000 - deutschebank: Mar26 1.1800, Dec26 1.2500 - citi: Mar26 1.1700, Dec26 1.2200
This desk's perspective aligns closely with ubs, which sees a bullish EUR/USD sentiment, leaning toward the upper end of the target range.
How other firms see it
Aligned firms, such as ubs and deutschebank, appear optimistic about EUR/USD in the medium-term outlook. In contrast, citi maintains a more conservative view, suggesting a weaker Euro trajectory compared to these bullish perceptions.
Of interest, the movements in USD/JPY are also relevant as they may react strongly to changes in Fed rhetoric versus BOJ policy, making it essential to monitor both currency pairs for potential spillovers.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US Treasury Secretary endorses Fed Chair Warsh amid inflation management concerns.
- 02Expected inflation decline tied to waning tariff impacts and energy prices.
- 03Attention shifts to potential ECB hawkish communications influencing EUR valuation.
- 04Desk's targets align closely with consensus bullish outlook on EUR/USD.
Market implications
Watch the EUR/USD level at 1.1500 as a pivotal point, contingent on upcoming ECB communications and any shifts in Fed sentiment. A breach could trigger significant moves in both EUR/USD and USD/JPY pairs.
Risks to this view
Key risks include a sudden shift in Fed policy or unexpected geopolitical events that could accelerate inflation, prompting a shift in market sentiment and reversing current forecasts.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Scotiabank | Bearish | 1.1200 |
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 24th of June.
US Treasury Secretary Besant expressed confidence in Federal Reserve Chair Walsh, saying Walsh would bring inflation down. Normally, the Treasury Secretary being confident in the abilities of the Fed Chair is not a focus. But as Walsh had to deny being US President Trump's sock puppet during confirmation hearings, so overt a level of support may not do that much to assist the idea of the Fed Chair being independent.
Saying Walsh will lower inflation is also a little problematic. US inflation should move lower in the coming months. The effects of the last round of US tariffs are fading from the inflation numbers.
Declaring the tariffs unlawful didn't change consumer price levels. But after a year of being imposed, the tariff effects should naturally drop out of inflation comparisons. Assuming Iran does not choose to tighten its grip on Hormuz, oil prices should slowly fade away from the inflation picture too.
But this is simply because the inflationary effects of the administration's policies and actions over the last year are now moving out of the picture. There could be a sock puppet running the Fed. The inflation path would still be exactly the same.
There's a lot more central bank noise today. The Bank of England, in particular, is out in force with speakers. However, the bank is not seen as changing rates right now, and so it's likely to be the European central bank speakers that attract market attention.
Nagel of ECB is likely to sound hawkish, as always, and will no doubt attempt to portray the recent policy error as being the right thing to do. That is going to be a bit of an uphill struggle. But Nagel has never seemed to meet an economic problem without wanting to respond with higher interest rates.
The situation in the Gulf continues to be murky. Trump was suggesting unfrozen assets could only be used to buy US products. Iran is saying that this isn't what they understand.
Markets tend to side with the Iranian viewpoint on most things, and this is not entirely irrelevant. It seems plausible, at least, that the focus of future purchases by the Gulf region at large will pivot away from the United States in the coming quarters, which would recycle petrodollars into European and Asian currencies. The disagreements and emotional social media posting by both sides is not changing investors' general inclination to look on the bright side of life, and crude oil has slowly inched lower.
Sources & References
How we cover this story
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