UBS On-Air: Paul Donovan Daily Audio 'Of mountains and molehills'
In the wake of the recent Anglo-US trade framework announcement, the desk interprets that while much was made in media circles, the underlying details are lacking in substance. Per the full note from UBS, US consumers are now positioned worse off compared to the start of the year, despite a slight improvement from last week. The focus will remain on how markets respond to ongoing trade tensions and possible legal challenges to import taxes discussed by President Trump.
What the desk is arguing
The desk recognizes that the newly announced Anglo-US trade framework, surrounded by considerable media hype, ultimately lacks substantive changes that would materially impact trade dynamics. Per the full note from UBS, this framework leaves US consumers in a worse position than at the beginning of the year, albeit slightly improved compared to last week.
Additionally, UK exporters may benefit from reduced taxes, while some US sectors will face better import conditions. However, the overarching narrative is shaped more by the statements from President Trump regarding the maintenance of 10% universal taxes on imports, underscoring a tendency towards protectionism.
Where it sits in our coverage
Our current consensus target for the GBP/USD pair is 1.075, with a range between 1.04 and 1.12. For perspective, notable targets are set by the following firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's outlook aligns with jpmorgan at the upper end of the consensus, suggesting a cautious optimism in rising GBP forecasts amidst complex trade relations.
How other firms see it
The broadly aligned firms see a potential stabilization or slight appreciation in GBP, taking cues from the recent Bank of England rate cut and ongoing trade discussions. In contrast, bofa holds a contrary view, indicating a more bearish outlook on GBP strength.
Expect the GBP/USD dynamics to be tightly correlated with the UK's monetary policy stance and developments in US trade policy, particularly the proposed import taxes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Anglo-US trade framework lacks substantive consumer benefits, as highlighted by UBS.
- 02US consumers are worse off than at the start of the year, implicating economic challenges.
- 03President Trump's reaffirmation of import taxes suggests an ongoing protective trade stance.
- 04Market response will largely center on these macroeconomic signals and potential legal challenges ahead.
Market implications
Traders should closely monitor the GBP/USD pair, especially as it approaches the psychological levels around 1.07 and 1.08. Market positioning may shift in relation to the next commentary from the Bank of England, which could pivot trader expectations.
Risks to this view
The primary risk to this outlook revolves around legal challenges to the proposed import taxes, which could lead to a significant shift in market sentiment. Moreover, any unexpected positive data from the US economy could undermine ongoing bearish sentiment.
Good morning. This is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's one o'clock in the morning London time on Friday the 9th of May.
Yesterday's Anglo-US trade framework was preceded by substantial media spin but ultimately revealed only minimal substance. This is a framework without too much detail. It leads US consumers worse off than they were at the start of the year but better off than they were a week ago.
It leaves global trade more disrupted than it was at the start of the year but less disrupted than it was a week ago. A couple of UK sectors get lower taxes and there may be slightly easier import conditions for a couple of US sectors. The UK has not indulged so wholeheartedly in consumer boycotts of US product as have some other countries but that remains a risk that no framework can control.
The relatively disinterested response of financial markets seems entirely appropriate. The Bank of England's rate cut was far more important to the UK's economic outlook than anything that came from the framework. What really mattered from yesterday's media op was not the framework but the comments of US President Trump.
Trump signalled that 10% universal taxes on US consumers of imports were going to stay. There is a precedent. US President Nixon did this in 1971 but it lasted only a matter of months.
If the rule of law still applies in the United States the legality of this may be challenged by the courts but Trump's determination to tax is firm. Trump's remarks also signalled a belief that imports, any imports, are a negative for the United States. This rather ignores the fact that imports can and obviously do raise living standards.
If bananas and barbies are deemed bad and were to be banned US living standards would fall. This approach rather sets the scene for other trade frameworks and arrangements and if this is truly what Trump believes then there is no way that the administration's trade policy can do anything other than weaken US consumers' standard of living. The data calendar today is overwhelmed with central bank speakers.
Bank of England Governor Bailey and Chief Economist Pill will no doubt elaborate further on the UK rate cut yesterday although with a split Monetary Policy Committee and Pill a dissent at that it's hard to know what they can say that will offer conviction of outlook to the financial markets. The Federal Reserve releases its speakers from the blackout period around the FOMC meeting and this allows for more commentary about how uncertain everything is. It would be unusual for the ECB to be the voice of certainty in central bank policy making but at least for now that appears to be what its speakers may be offering.
April trade data from China is due at some point in the near future. This is expected to show a sharp slowdown in export growth. Remember of course that China will still be selling more or less as usual to other economies and the avoidance of US trade taxes that takes place via rerouting supply chains may also have ramped up somewhat.
A negative export growth figure would be unusual it's not absolutely impossible. While allowances for tariff avoidance must be made this data from China will hint at the possible potential for supply disruption in the United States in the near term. That's all for today.
Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG regulated by FINMA in Switzerland. It's subsidiaries or affiliates collectively referred to as UBS.
In the USA UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. This material is for your information only and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product.
The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS. Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story