UBS On-Air: Paul Donovan Daily Audio 'No reset to factory settings'
The US Trade Court's recent ruling, deeming approximately half of former President Trump's trade tax increases as illegal, introduces both optimism and uncertainty into the market. Per the full note from UBS, while this ruling alleviates a significant tax burden for consumers, the potential for appeals and ongoing tensions surrounding US trade policy complicates the outlook. The ruling's implications extend beyond domestic economics to international trade relations, particularly with the UK and the EU, which may be hesitant to engage further given the uncertain legal landscape. Ahead of any decisive trade agreements, uncertainty may dampen market sentiment and complicate positioning across affected currency pairs.
What the desk is arguing
The US Trade Court's decision to invalidate a sizable portion of Trump's tariffs is being framed as a short-term positive for the economy; however, it does not signify a wholesale restoration of previous trade balances. Per the full note from UBS, the ruling is expected to increase uncertainty regarding future trade negotiations and the potential for further tax increases.
While this decision may reduce immediate pressure on consumers and businesses, the desk highlights that legal debates will likely continue. The ruling will be appealed and can still prompt alternative approaches to trade restrictions which may create volatility in affected markets.
Where it sits in our coverage
Currently, our consensus target for EUR/USD sits at 1.075, with ranges varying among major banks. Notable firms have outlined the following targets: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This outlook indicates that while some firms align closely with our target, others, like bofa, take a more cautious stance at the lower end of the spectrum. Market dynamics remain finely balanced, suggesting that sentiment could shift swiftly with any developments in US trade policy.
How other firms see it
General market sentiment aligns with firms like jpmorgan who respond favorably to the US trade court ruling, seeing potential for easing pressures on the economy. In contrast, firms such as bofa maintain a more conservative perspective, emphasizing the persistent uncertainty surrounding future tariffs.
Key intersections for this thesis include the GBP/USD dynamics tied to ongoing UK trade discussions and the implications for negotiations with China, which may weigh on market behavior amid fluctuating trade stability narratives.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US Trade Court ruling reduces potential tax burden but increases uncertainty.
- 02Future trade agreements, especially with the UK, are now in a precarious position.
- 03Expect volatility in markets as legal appeals potentially reshape trade policy directions.
- 04Trade policy remains a critical determinant for upcoming currency movements.
Market implications
Watch for volatility in the GBP/USD and potentially impacted commodity currencies. The upcoming trade negotiations with the UK and the EU may drive significant shifts in market positioning as traders respond to evolving legal rulings.
Risks to this view
The primary risk lies in the outcome of the appeals process regarding the trade court ruling. Should the Supreme Court reverse this decision, it may lead to a reinstatement of the tariffs, prompting renewed concerns over consumer costs and further complicating international trade negotiations.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 29th of May. Yesterday the US Trade Court ruled large swathes of US President Trump's trade taxes to be illegal, including tariffs imposed on products from the penguins of the Heard and McDonald Islands.
About half of this year's tax increases are to be affected by this ruling. Separately, Trump megadonor announced that they will be stepping away from their informal position within the administration. Financial markets have been reacting positively.
However, some note of caution is needed. The US has not reset to its factory settings. On the surface, the trade ruling lifts half of what has been a considerable potential tax burden from the shoulders of US consumers and companies.
That is a positive for the US economy. But the main consequence of this is to be uncertainty increasing. The decision will be appealed and the US Supreme Court has deferred to Trump, in preference to legal precedent, in some past rulings.
Trump will certainly attempt to find other pieces of trade legislation that can be pressed into service. Thus, other routes with which to increase US consumers' tax burdens may spring into existence. Taxes on steels and autos, amongst other things, are also unaffected by the ruling.
But there is yet more uncertainty beyond the wrangling of lawyers and the possibility of the ruling being overturned. What does this mean for the non-binding trade agreement with the UK? The agreed US tax cuts on UK products have not, in fact, so far happened.
Will the UK continue to try and force the terms of the informal agreement into something more concrete if the legality of the US threats are in question? What will happen with the current EU trade talks or the China trade talks? Is there any point negotiating seriously if the status of US threats is in legal limbo?
Critically, why should any business commit to a long-term investment or employment decision in the US today while there is this level of uncertainty over the costs of business in the US? Already the uncertainty created by the wild swings in Trump's policies was impacting business activity. We are now adding another layer to that uncertainty.
The price increases in the US that have already happened in anticipation of tariffs, or which have been attributed to tariffs, whether justified or not, are likely to remain in price and, as mentioned, steel and auto tariffs are unaffected by this. Existing tariffs, where they have been collected, will not, it seems, be returned. Companies that have already persuaded their customers to accept price increases are thus unlikely to cut prices, just because there is a chance that tariffs will be removed.
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