UBS On-Air: Paul Donovan Daily Audio 'Powell's policy problem'
The desk believes that the European Central Bank (ECB) will likely proceed with a quarter-point rate cut today, as anticipated by all 52 economists surveyed, pushing toward a more dovish stance amidst disinflation pressures. Per the full note from UBS, ECB President Lagarde's upcoming communication will be pivotal in clarifying whether further cuts will occur in July, which would signify a readiness to support the economy amid current challenges. This dovish pivot contrasts sharply with the Federal Reserve's more cautious, data-dependent approach, a contrast that could influence currency pairs such as EUR/USD and put upward pressure on the euro if expectations hold. As we analyze market reactions in the wake of this decision, traders should remain alert to subsequent developments in U.S. economic data that may alter interpretations of Fed monetary policy.
What the desk is arguing
The desk holds that a quarter-point rate cut by the ECB seems certain, as highlighted by the unanimous consensus among surveyed economists. According to UBS's Paul Donovan, not cutting rates would effectively tighten real rates, which would be counterproductive at this stage of the economic cycle.
Given the current disinflation pressures in Europe, the ECB's potential move to lower rates signifies confidence in addressing sluggish growth without the chaotic backdrop complicating the Fed’s decisions, as expressed in Donovan's remarks regarding the unpredictability stemming from U.S. economic policies.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with the following firm targets aligned: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's forecast is towards the upper end of expectations, particularly regarding a potential bullish shift in euros if today's cut aligns with consensus. This positions us against more cautious outlooks, primarily influenced by the Fed's contrasting macroeconomic environment.
How other firms see it
In line with our outlook, jpmorgan sees potential for a stronger euro, while bofa maintains a more conservative stance, suggesting volatility given conflicting economic indicators. Currency pairs like EUR/USD and the impact of ECB's decisions will be crucial to monitor moving forward, especially as traders evaluate the Fed's trajectory in contrast to the ECB's actions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 0152 out of 52 economists expect the ECB to cut rates by 25 bps today.
- 02ECB's dovish stance stands in contrast to the Fed's caution amid U.S. economic uncertainties.
- 03Lagarde's commentary post-decision will shape market sentiment and expectations for future cuts.
- 04Immediate market focus will be on the euro's reaction to ECB policy compared to U.S. economic signals.
Market implications
Watch for the euro's movement around the 1.075 level, particularly post-ECB announcement. A decisive cut could bolster bullish positions in EUR/USD, while waiting for guidance on potential July cuts may create volatility in the exchange rate.
Risks to this view
The call could be invalidated by unexpected data out of the U.S. that may reinforce the Fed's resolve to maintain rates, or if the ECB signals a more cautious approach post-cut, dampening expectations for further easing.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 5th of June. The European Central Bank is widely expected to cut rates today by a quarter point.
There is some uncertainty about future signals, does the ECB cut again in July in particular, but a rate reduction today seems certain. 52 out of 52 surveyed economists expect a quarter point cut and how could so many economists possibly be wrong? For the future outlook we have ECB President Lagarde speaking. Europe has disinflation pressures and to fail to cut rates would ultimately imply a tightening of real rates which is not desirable at this stage of the economic cycle.
The European decision is likely to upset US President Trump who yesterday attacked the US Federal Reserve's policy independence for failing to cut rates in the wake of weaker economic signals. The Fed is data dependent which has never been a great policy. Monetary policy affects the economy with a lag.
The risk with waiting for the release of increasingly unreliable short-term data rather than making an informed decision on medium-term trends is that policy will change too late. However, amidst the considerable uncertainty caused by Trump's economic policies and the wild swings in those economic policies, it may be that for once Fed Chair Powell is right or at least not entirely wrong. The impact of policy swings on employment is uncertain.
How quickly inflation will rise in response to tariffs is uncertain. The reaction of US consumers to higher inflation is uncertain. The reaction of US companies to tariffs is uncertain and so on and so on.
The ECB does not have to contend with any of this chaos and so can cut rates with confidence. The Federal Reserve does not have that luxury. US data flow today is not the sort of data that the Fed is dependent upon.
First-quarter productivity and unit labour cost numbers are far too dependent on the unreliable first-quarter GDP to be considered market or policy moving in isolation. The trends in productivity do matter for long-term growth, of course, and this is where an inherent tension lies across nearly all major economies. Social change should enhance productivity because it only makes sense to adopt a new technology if we end up doing more with less.
However, the social changes technology brings generates extremes of fear and loss aversion. In such circumstances, those who are afraid look for scapegoats on which to blame the uncertainty. Any group that has recently moved towards more equal treatment is one target.
At the moment, the LGBTQ plus community is being targeted in several economies and consistently foreigners are ideal scapegoats. That then encourages prejudice politics of which economic nationalism is one manifestation. The rise of prejudice undermines or even overwhelms the productivity gains of the technology because productivity depends on how the technology is actually applied.
The mantra for success is right person, right job, right time. Banning immigration from entire countries, attacking the LGBTQ plus community and demonising foreign trade are instances of prejudice politics that undermine long-term trends in growth and economic productivity. The date of calendar is not very inspiring elsewhere either.
German factory orders rose in April by more than expected, but this is a very volatile series and the consensus estimate is made up of what appears to be a collection of wild and random guesses. Italian retail sales are also due for April. 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.
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