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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
The desk sees potential tensions surrounding the Federal Reserve's interest rate decision, especially with political implications clouding what may seem like obvious economic fundamentals. Per the full note from UBS, the significant concern lies in whether any FOMC member could credibly dissent for a rate cut without being perceived as influenced by political pressure, particularly from President Trump’s administration. The current economic environment, impacted by trade tariffs, creates grounds for a rate cut, which some economists support. Amid this, traders should pay close attention to how the Fed's decisions might align with broader economic signals and market reactions, as there's a heavy expectation of unchanged rates amidst ongoing uncertainty.
The desk posits that the political atmosphere surrounding the Federal Reserve's decision-making process complicates the dynamics of interest rate adjustments significantly. Per the full note from UBS, the dilemma centers on whether any dissenting opinions for a rate cut can be formulated without risking perceptions of political bias.
Amidst the ongoing tensions from trade tariffs, an economically sound argument exists for rate cuts to mitigate potential growth damages, as posited by Paul Donovan of UBS. However, any calls for a change in policy might be seen as politically motivated, dampening their credibility.
As of now, our consensus target for the USD remains at 1.075, with a range spanning from 1.04 to 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns closely with jpmorgan, which appears to support the idea of maintaining a cautiously optimistic stance, while it diverges from bofa's more conservative outlook, resting at the lower end of the spectrum.
Firms such as jpmorgan and hsbc present perspectives that appear to support holding off on rate cuts, primarily citing stabilization in economic indicators. Meanwhile, bofa provides a contrary view, advocating for caution due to potential downside impacts from political volatility and trade uncertainties.
Market dynamics surrounding the EUR/USD pair could reflect shifts in these sentiments, as the trajectory of U.S. monetary policy will likely resonate through to other major currencies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should focus on how the upcoming Federal Reserve meeting impacts sentiment, particularly the potential for any unexpected rhetoric or tone shifts from the FOMC that could influence USD pairs. Additionally, with the consensus on rates remaining static, volatility around USD/EUR may present trade opportunities based on shifts in Fed outlooks.
Risks to this view
The primary risk to our outlook stems from any unexpected signaling by Federal Reserve officials that suggests a more aggressive response to political pressures or a significant shift in economic data suggesting stronger-than-expected growth. This could trigger a repricing of interest rate expectations, adversely affecting USD valuations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's five o'clock in the morning London time on Wednesday the 30th of July. The US Federal Reserve meets today to decide interest rates.
The question is not about policy, that will be unchanged amidst the ongoing uncertainty and chaos of trade taxes and their impact, but the real question is who dissents and argues for a rate cut, and whether any FOMC member can credibly argue for a rate cut without looking like a political puppet of the US President. Of course, one can make an argument for rate cuts. If you believe the damage to economic growth of the highest tariff rate in 90 years outweighs the near-term inflation rise, then of course lower interest rates are entirely justified.
But that is not the problem. An economically plausible case can be made for immediate rate cuts, though I would classify that as a risk case, not the base case. But it seems very difficult to see how a US Fed official could voice that case without it being presented to the world as a political stooge's action, even if they sincerely believe what they're saying.
And the more they protest their impartiality, the more the media will detect US President Trump's hand tweaking the puppet strings in the background. The initial guess at second quarter US GDP is not going to help the assessment of where rates should be going. This data is largely guesswork.
Actual reliable evidence is only a very minor part of today's calculation. The second quarter was particularly turbulent. Democrat consumers had rushed to bring forward their purchases of durable goods into the first quarter of this year, fearing the effects of trade taxes.
There will be payback for that, not so much in April perhaps, but certainly towards the end of the second quarter. The trade taxes themselves did not even begin to show up until the June inflation data, and only in a limited number of cases. The 9th of April taxes are really a third quarter story.
But the general uncertainty, halting investment and hiring, was certainly there in the second quarter. So all in all, it's a mixed picture. With inventory stockpiling continuing, the net effect is likely to be a positive second quarter on the initial read.
But the value of that is more for political point scoring than to actually improve our understanding about the direction of the performance of the US economy. Over the trade battlefield, the now familiar strains of a US bugler sounding the retreat can be heard. Although still dependent on presidential whim, the United States is to extend the so-called trade truce with China, meaning US consumers will be tacked aggressively, but not at unimaginably high levels.
Elsewhere, US President Trump has been attempting to sound tough with Russian President Putin over a Ukraine ceasefire. The antagonism has pushed up oil prices a little, but this is so far noise within a range. While oil trades might get excited by such moves, economists refuse to be swayed by this sort of fluctuation.
It is not an economically significant change at the moment. Spanish consumer price inflation for July is due. These are preliminary numbers and therefore light on the detail.
There are mixed pressures. Bear in mind the global trend to spend on having fun has a positive impact on Spain's summer demand and for prices related to leisure travel. However, the general sense of the coming slowdown in the United States is working as a disinflation force for the rest of the world, and that limits the degree of upside potential that exists around inflation elsewhere.
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.
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