UBS On-Air: Paul Donovan Daily Audio '“Substantial progress”'
The desk's view is that substantial progress in US-China trade talks may herald a cautious easing of trade tariffs, which would ease previous trade pressures on currency valuations. As UBS's Paul Donovan notes, the discussions have attracted attention and could signal a willingness from the US to reduce the current tariff levels that are constraining trade growth. The consensus across firms shows a general expectation around 1.1700 for EUR/USD, indicating a mix of confidence and caution in the Eurozone amidst these developments.
What the desk is arguing
The desk interprets the US-China trade negotiations, highlighted by Treasury Secretary Bessent's comments on substantial progress, as a potential turning point that could influence currency valuations significantly. Per the full note, investors are mainly focused on how effectively the US will retreat from tariffs that have hindered bilateral trade.
The desk points out the current tariffs are unsustainable at their existing levels, with reductions needed to stimulate trade flows. Donovan notes that even a hypothetical reduction to 80% would still render trade largely ineffective, suggesting significant relief is required to restore normal economic activity.
Where it sits in our coverage
In terms of FX targets, consensus for EUR/USD stands at 1.1700 with a range of 1.1200 to 1.2000. Notable firm targets include ubs aiming for 1.2000 and jpmorgan at 1.1800 for December 2026.
While our view aligns with the upper bound of the range, it diverges from firms such as citi, which has a more conservative target of 1.1300 for the same period, reflecting a more cautious approach to the Eurozone economy in light of trade uncertainties.
How other firms see it
Several firms are aligned with our perspective, emphasizing the importance of trade developments. Firms like hsbc and scotiabank reflect confidence in a recovery in EUR/USD, with targets around 1.1734 and above. Conversely, firms such as deutschebank and citi present a more cautious stance, positioning their targets towards the lower end of the consensus range.
Related markets to monitor alongside EUR/USD are GBP/USD and USD/JPY, both of which may experience spillover effects based on the evolving trade dynamics and potential shifts in monetary policy reflecting tariffs resolution.
What the calendar says
There are no high-impact economic events scheduled in the coming weeks that might significantly alter market sentiment regarding trade developments, requiring traders to remain attentive to news flows and updates from ongoing US-China negotiations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-China trade talks are progressing, potentially easing tariffs
- 02Current consensus for EUR/USD sits at 1.1700
- 03UBS sets a more optimistic target at 1.2000 for December 2026
- 04Expect mixed reactions among firms based on outlooks for Eurozone economic recovery
Market implications
Watch for developments around trade negotiations, particularly any official statements or adjustments to tariff rates that could alter the USD's strength. The EUR/USD trading range stands tightly around the 1.1700 mark, making frequent testing of this level critical in the near-term.
Risks to this view
If the US administration fails to follow through on tariff reductions, or if significant trade tensions resurface, it would likely undermine the current bullish sentiment in EUR/USD. Further complications in diplomatic negotiations could lead to a return to more pronounced currency volatility.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 12th of May. Financial markets are once again focused on trade taxes, with discussions between the US and China being described as having made substantial progress over the weekend.
The statement came from US Treasury Secretary Besant, but presumably on so critical an issue the comment was cleared by US President Trump beforehand. Details are due today. The only thing investors are really going to be concerned with is how quickly and how far the US is prepared to retreat on the issue of trade taxes.
The current rate of tariffs will effectively halt bilateral trade. A reduction to 80%, which is a number suggested by Trump, would also effectively halt bilateral trade. A significantly lower number, say 20%, would allow trade, but would also do economic damage.
China's April trade data, released on Friday, did show strength in exports. That's being put down to a process of re-routing exports, just as during Trump's first term the full force of US trade taxes are blunted by sending goods from China via third countries. It will take some time to get a sense of how much re-routing is taking place this time, but it was about a third of exports to the US after 2018, when trade taxes were less comprehensive than they are today.
There are costs associated with re-routing, but they will obviously be a lot less than the price US consumers have to pay under trade taxes. Trump has threatened to tax pharmaceutical prices with another tariff, but at the same time has suggested that they will sign an executive order to lower drug prices. Regardless of the economics of this, it is interesting how much of the current US administration's policies seem to hark back to US President Nixon, who also instituted a universal 10% tariff and government control of prices.
Whether the president can dictate such moves is another matter. Non-sent coins are still being produced, despite Trump ordering their production to be stopped, for example. The threat of court action against this move seems very real, and it adds another layer of uncertainty on the trade tax uncertainty that already exists.
In a generally quiet data calendar, the Bank of England holds sway with four separate speakers. The bank was divided three ways in its last monetary policy decision, and there is a certain amount of drama, therefore, in the commentary. In the United States, Fed Governor Kugler is going to be speaking on the economic outlook, but at the current moment in time, any US economic outlook has to rely more on scenarios than on certainty.
Sources & References
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