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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
The desk interprets the recent criminal investigation into the Federal Reserve as a significant threat to the institution's independence, which may influence future monetary policy decisions. As per the full note from UBS, this situation arises from perceived pressure from President Trump for rate cuts, and could lead to a hawkish stance from the Fed in response to defend its autonomy. With initial market reactions seeing the dollar and treasuries soften, the complexities surrounding Fed Chair Powell's position become evident, particularly given the potential for increased Senate scrutiny of future appointments. Given these dynamics, traders should remain vigilant about the impacts on U.S. monetary policy as this story unfolds.
The desk holds that the criminal investigation initiated by the US Department of Justice might compromise the Federal Reserve's reputation and influence its policy decisions. This is underscored by Fed Chair Powell’s explicit remarks linking the investigation to the Fed's resistance to political pressure for interest rate cuts, suggesting significant political ramifications for future monetary policy decisions.
Bond and currency markets initially reacted negatively to these developments, with moves indicating a weaker dollar and treasuries. The broader implications of this investigation may prompt the FOMC to adopt a more hawkish tone if they perceive pressure on their independence. Notably, the increasing bipartisan concern over Fed autonomy could make it politically easier to side against rate cuts in the future, particularly as expressed by one key Republican Senator.
Currently, our consensus target for USD/EUR stands at 1.075, with a range from 1.04 to 1.12. Firms contributing to this outlook include: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
This view aligns with the firm's targets as negotiations around Fed policy intensify, and is positioned close to the higher end of the range.
Several firms, including jpmorgan and citi, are aligned in their assessment of growing Fed independence, advocating for a cautious approach to dollar exposure amidst these uncertainties. Meanwhile, contrary opinions arise from bofa, suggesting a more immediate dovish shift might still be feasible depending on economic metrics.
Traders should keep an eye on USD/JPY as it may provide insights into risk sentiment affected by these developments. Additionally, monitoring statements from central bank officials will be critical as they navigate this delicate political landscape.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Watch for signs of increased hawkishness from the Fed that could emerge in future FOMC statements or decisions. Pay attention to the USD/EUR levels around 1.075, which may indicate a significant response to ongoing investigations.
Risks to this view
Should there be a clear resolution to the investigation favoring the Fed's current stance, or if Powell signals a willingness to adapt to political pressures, this could lead to a stronger dollar and shift expectations for future rate cuts.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning, London time, on Monday the 12th of January. On Friday, the US Department of Justice launched a criminal investigation into the US Federal Reserve and Fed Chair Powell.
Powell has very explicitly stated that they believe the investigation to be because the Fed has not cut interest rates in the way that US President Trump wishes. The bond and currency markets would seem to be siding with the Fed Chair's perspective, with the dollar and treasuries initially weaker. However, if this is an attempt to weaken the independence of the Fed, it may backfire on the administration.
One could hypothesise that Powell is less likely to stand down as a governor of the Federal Reserve, given the publicly defiant stance that is being taken over this criminal investigation. Trump does not appoint the next Fed Chair, merely nominates the next Fed Chair, who must either be a current governor or fill a vacant gubernatorial seat. The Senate has to confirm the next Fed Chair, and that may become more difficult if this is perceived as an overt assault on Fed independence.
Already one key Republican senator has said that they will not support any new Fed appointments while this investigation is ongoing, while criticising administration officials for attacking Fed independence. Taking perhaps a more extreme view, if there is a finally balanced interest rate decision in the future, overt attacks on Fed independence might tilt the FOMC members towards a demonstration of hawkish defiance. Indeed, given market reactions, that might be the safer response from a bond market perspective.
The necessity of underscoring independence may become a factor in interest rate setting from both an institutional and a market consequence perspective. So, while markets are likely to be concerned by these legal developments, there are good reasons to price in some support for strengthening independent policy. There are several Fed speakers on the schedule today, and in these circumstances market interest in their remarks is inevitably going to be heightened.
However, the release of the December consumer price inflation data tomorrow is likely to be the political focus, as the US administration seems to be prioritising the affordability crisis. Technical factors will push up the inflation numbers this time. What is important is that the inflation experience of the population will not really have changed.
That is to say, inflation experienced in the real world did not decline in the way that was reported last month. By calling for interest rate cuts, the administration will find it very difficult to simultaneously blame the Fed for higher prices, and opinion polls suggest that the narrative of tariffs as a driver of inflation has become very established, especially amongst Democrat and independent voters. In Japan, there are widespread media reports that the new Prime Minister, Takashi, will call a snap election.
This speculation is based off of the Prime Minister's relatively high approval rating and the expectation that the ruling coalition would seek to capitalise on this at a time when support for the main parties themselves is relatively unchanged. An election is unlikely to produce a significant shift in terms of policy. There's been a bit more focus on fiscal stability from Takashi, but there would perhaps be more certainty about the current policy path if the government increased its control over the lower house of the Diet.
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.
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