UBS On-Air: Paul Donovan Daily Audio 'Quite like old times'
The desk posits that while Federal Reserve Chair Powell's remarks today are likely to maintain the prevailing dovish tone established at the most recent FOMC meeting, hints at a more cautious approach toward rate cuts could emerge. Per the full note source, the Fed's direction seems influenced by comments from Fed Governor Mirren, who advocates for a two-percentage-point reduction in rates, a position that raises questions amid the current inflationary trends in durable goods and core items. Given the current market expectations, the muted market response to global events—like the anticipated discussions between President Millet of Argentina and President Trump—hints at a broader market reluctance to shift positioning significantly ahead of Powell's address and until clearer data emerges on inflation and rates.
What the desk is arguing
The desk believes that Chair Powell's speech is poised to reaffirm recent dovish sentiment from the Federal Reserve while subtly indicating less urgency for further rate cuts. Such a stance could align with investor sentiments already seen in the market, where speculation around further monetary easing has dimmed in light of price stability concerns.
Support for this viewpoint stems from the discussions surrounding Powell's upcoming comments, particularly in light of recent statements from Fed officials suggesting a tempered approach to rate adjustments compared to what Governor Mirren proposes. Observations from recent inflation data indicate that although overall inflation remains a concern, certain categories, like durable goods, have exhibited upticks, leading to speculation regarding the Fed's path forward.
Where it sits in our coverage
Our current consensus target for USD/ARG is set at 1.075, with an estimated range from 1.04 to 1.12 based on insights from various firms. The targets include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This perspective aligns closely with the consensus view from these firms, particularly as the jpmorgan target rests at the upper end of the expected range, indicating optimism towards USD strength relative to the peso in light of Powell's expected comments.
How other firms see it
Firms broadly aligned like jpmorgan are emphasizing a stable USD outlook alongside a cautious Federal Reserve. In contrast, bofa reflects concern over aggressive rate cut expectations, which could set a divergent path if inflation continues to defy expectations.
Market participants should monitor closely the relationship between USD/ARG and broader sentiment around U.S. economic indicators, particularly those reflecting inflationary pressures, to gauge potential shifts in the Fed's approach in the near future.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Powell's speech is expected to maintain dovish tone, reflecting past FOMC decisions.
- 02Fed Governor Mirren's push for a two-percentage-point rate cut raises questions amid rising core inflation.
- 03Market responses remain muted ahead of Powell's speech, indicating cautious positioning.
- 04USD/ARG targets show a range from 1.04 to 1.12, with consensus leaning towards a stronger dollar.
Market implications
Traders should keep an eye on the USD/ARG pair's movement around the 1.075 level as Powell's speech unfolds. Any hawkish undertones contrasting with recent dovish sentiment could lead to significant volatility.
Risks to this view
Key risks include a stronger-than-expected inflation print before or immediately after Powell's speech, which could necessitate a reassessment of rate expectations and prompt a rapid repositioning in FX markets.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 23rd of September. US Federal Reserve Chair Powell is to speak on the economic outlook today at the Greater Providence Chamber of Commerce.
The Greater Providence Chamber of Commerce is of course in for a treat. Powell is unlikely to deviate too much from the tone of the last FOMC meeting, it would be very difficult to do so, but the nuance of where rates will end up is of some interest. Some members of the Federal Reserve have suggested further rate cuts are less likely this year.
And then yesterday Fed Governor Mirren suggested interest rates needed to be two percentage points lower. Coincidentally that is the view of a person outside the Fed too. The audience of economists listening to Mirren might have questioned the consistency of some of their arguments if, as Mirren suggested, tariffs do not cause inflation and US monetary policy is so extremely restrictive, it's hard to understand why core inflation, and especially inflation for durable goods, is actually rising.
Argentinian President Millet is to meet US President Trump today. Millet is not expected to bring their chainsaw to the meeting, instead Millet will be bringing a list of requests, top of which is likely to be money. US Treasury Secretary Besant has been channelling their inner Draghi and delivering a whatever it takes set of comments, without actually promising anything specific at this stage.
Besant does have access to US taxpayer money that could be put to use in Argentina, but because it is US taxpayer money, the politics of this will require conditions to be attached. The financial markets response so far has been muted. The peso did rally against the dollar, but even against the dollar it's only back at the level of a couple of weeks ago.
Against the euro the rally is obviously less. There is a great deal of uncertainty about what happens next, the conditions Trump will attach to any handouts, the US politics of all of that, and the practicalities of those conditions given the Argentine electoral cycle, and so on. The data calendar is littered with business sentiment polls, clamouring for attention that they don't really merit.
The divorce between sentiment and reality in Europe has been noted, and in the States the degree of political polarisation in survey responses is becoming farcical. The latest iteration has Republicans living in a crime-ridden hellscape, barely able to leave their homes, while Democrats leave their doors wide open and their smartphones lying around unattended. Probably not that extreme, as the idea of any US consumer leaving their smartphone unattended stretches credibility beyond endurance, even in survey evidence.
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