UBS On-Air: Paul Donovan Daily Audio 'No cuts for now'
The desk interprets recent commentary from UBS highlighting that the Federal Reserve is not in a hurry to cut interest rates amid rising uncertainty caused by trade tariffs. Per the full note, Powell's shift away from strict data dependency signals a cautious approach to the monetary policy landscape, especially as inflation is expected to rise in the short term due to tariffs. Market consensus has begun to coalesce around the idea of an inflationary environment, influencing expectations about rate cuts, albeit gently. Given the lack of impactful events on the calendar, traders should remain focused on labor market indicators for potential shifts in this narrative.
What the desk is arguing
The desk posits that the Federal Reserve, led by Chair Powell, will adopt a conservative stance regarding interest rate cuts, primarily influenced by the inflationary pressures from tariffs as highlighted in recent communications from UBS. This narrative indicates that markets should prepare for a gradual easing cycle rather than an aggressive pivot.
Supporting this view, the expectation is for inflation to become more pronounced in the July consumer price index, suggesting that the Fed's decisions will increasingly consider future price pressures over historical data tendencies. Powell's remarks to Congress about uncertainty and insufficient labor market resilience reinforce the cautious trajectory expected in the upcoming months.
Where it sits in our coverage
Currently, the consensus target for the EUR/USD pair is set at 1.075 with a range around 1.04 to 1.12. Notable forecasts include: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
The desk’s outlook remains firmly aligned with jpmorgan’s position at the higher end of the forecast spectrum, indicating a potential appreciation in the euro as markets adjust to evolving economic signals.
How other firms see it
Several firms, including jpmorgan, are aligned with this view of moderate rate easing by the Fed, anticipating a more cautious approach amid inflation concerns. Conversely, bofa appears to take a more bearish stance, predicting less upward movement in the EUR/USD pair.
Key points of interest will include the relationship between Fed policy deliberations and currency pairs like EUR/USD, particularly as inflation metrics become more significant in shaping monetary policy decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed Chair Powell indicates no immediate rate cuts.
- 02Optimism around inflation impacts from trade tariffs.
- 03Markets expect gradual easing rather than aggressive cuts.
- 04Labor market resilience will be a critical indicator.
Market implications
Traders should watch closely for the July inflation report due to its potential to influence Fed policy. The expectation around the 1.075 target range for EUR/USD indicates a cautious bullish sentiment, particularly if inflationary pressures continue as discussed.
Risks to this view
A reversal of this thesis could occur if labor market data shows significant weakness, triggering panic about economic slowdown which may push the Fed to act more aggressively. Additionally, unexpected geopolitical developments could shift market sentiments quickly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Wednesday the 25th of June. In the United States yesterday, a group of people, most of whom are not trained economists, offered profound statements on the US economic outlook.
In other words, US Federal Reserve Chair Powell spoke to members of Congress. The main conclusions are that tariffs are creating uncertainty and that US interest rates will not be cut that quickly. This is not necessarily new information for financial markets.
There was a further shift away from Powell's favoured data dependency mantra, acknowledging that relying on backward-looking data was not perhaps the best way to set policy with an eye to the future. This was in the context of the coming increase in domestic inflation as US President Trump's trade taxes start to show up in consumer prices. That's most likely to be evident in the July consumer price data.
As such, the move from data dependency is only partial as the increase in inflation is inevitable and it takes place in the short term. But for now, it suggests a slow start to the rate-easing cycle in the States and one that is dependent on how much damage is going to be done to the US labour market in particular. We'll be getting a repeat performance from Powell before the Senate today, with, obviously, the question-and-answer session the main opportunity for new information to emerge.
It would probably be unwise to expect any insights. Global markets seem to have priced in a tentative truce between Israel and Iran holding in the wake of the rather shaky ceasefire yesterday. The balance of risks is now likely to be skewed in the sense that markets will react if there are signs of a potential weakening of the ceasefire, but evidence of a more lasting solution is likely to provoke little reaction.
This is especially so in the wake of US intelligence reports that US military strikes failed to destroy Iranian nuclear facilities. A reluctance to price extreme tail risks means that markets will be less concerned about the failure to end Iran's nuclear programme per se, and more about what that failure might mean for general regional stability in the coming months. The data calendar is woefully inadequate today.
Some US housing data is about all there is going on. In Europe, discussions about defence spending are likely to be a focus as the NATO meeting continues. There is already an expectation of an increase in defence spending, even if Spain has an opt-out from spending 5% of GDP.
Sources & References
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