UBS On-Air: Paul Donovan Daily Audio 'Supporting consumers'
The European Central Bank's (ECB) recent 25 basis point rate cut signals a deliberate move to avoid restrictive monetary policy amid declining inflation, as noted by Paul Donovan of UBS. This decision is reinforced by the ECB's outlook projecting additional cuts in 2025, indicating a shift towards a more accommodative stance to support economic activity, despite concerns about data accuracy in the Eurozone. As the market digests the implications of these cuts, attention may also gravitate towards the upcoming US import and export prices data, which could influence USD positioning and euro crosses. Per the full note , the current market environment favors further research into economic indicators as markets adapt to evolving central bank signaling.
What the desk is arguing
The ECB's recent decision to cut rates is a strategic move to support consumer spending amid a backdrop of easing inflation pressures in Europe. Per the full note , Donovan emphasizes that maintaining a restrictive stance is unwarranted at this juncture, particularly as the central bank seeks to stabilize economic activity in the Eurozone.
With real interest rates poised to rise if the ECB opted not to cut, the path of least resistance appears to favor more accommodative monetary policy. Donovan notes that underreported economic activity data, particularly in Germany, poses challenges for the ECB's assessment, where signals of stability in retail sales might not reflect the full picture of domestic demand.
Where it sits in our coverage
The desk maintains a consensus target for EUR/USD at 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s outlook aligns with jpmorgan, which is positioned towards the upper bound of our forecast range. However, it diverges from bofa, which holds a more conservative target, indicating some market differentiation in sentiment regarding the ECB's approach.
How other firms see it
Several firms, including jpmorgan and citi, align with the desk's view of an increasingly accommodative ECB. Conversely, bofa presents a more pessimistic outlook, suggesting that economic recovery may face hurdles.
The dialogue surrounding the EUR/USD will likely interlink with broader economic signals from the ECB and geopolitical events affecting the Eurozone's growth prospects, especially influenced by upcoming US economic data.
What the calendar says
With recent data reflecting on Euro area economic activity and the ECB’s decision, traders should keep an eye on forthcoming US import and export prices, which may provide essential context for service trends and overall economic robustness. There are no immediate high-impact events in the ECB calendar to detract from this narrative, allowing for greater focus on upcoming economic releases.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The ECB cut rates by 25bps to avoid restrictive policy amidst declining inflation.
- 02Market participants expect further rate cuts from the ECB in 2025.
- 03Economic data quality in the Eurozone challenges precise assessments.
- 04US import and export prices data may influence EUR/USD movements.
Market implications
Market participants should watch for signals from US import and export price data due later today, as these may impact USD positioning in euro crosses. A consistent trend in these figures could bolster the dollar against euros or reinforce existing trends depending on the data.
Risks to this view
Should future data from the Eurozone significantly contradict the ECB's easing narrative, it could force a re-evaluation of the current market stance. A substantial uptick in inflation or stronger-than-expected economic growth would challenge the direction of both the ECB’s policy and market sentiment.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 13th of December. Yesterday's European Central Bank rate cut was as expected.
The decline in inflation pressures in Europe mean that a restrictive policy really is not needed. And if the European Central Bank had kept rates unchanged, real interest rates would now be rising. The press conference signalled that more rate cuts should emerge in 2025 for the same reason.
A move towards a 2% rate seems to be warranted in Europe. There is some uncertainty, of course. The European Central Bank does have to contend with data that tends to underestimate the level of economic activity in the Euro area.
German retail sales have in reality been stable, not collapsing over the past couple of years for instance. German import data also fell less than expected in October, which might imply a better level of domestic demand. But most central banks are having to face up to the problems of poor data quality.
The Swiss National Bank's 50 basis point rate cut was more than the market had anticipated, reflecting perhaps a desire to shock the currency markets. But the pace of further rate cuts may now be more conservative. UK October monthly GDP was weaker than anticipated, falling by 0.1% month on month.
This is not a market-moving figure because, at this stage, investors do not really believe the data. It's a very, very rough approximation of what's happening in the economy. It's worth remembering that the United Kingdom doesn't accurately know what unemployment is in real time, so measuring something as complex as the whole economy in real time is far less likely to be successful.
Manufacturing and industrial production data were weaker in October. Later today, we will get US import and export prices. These are not traditional market focuses, but their importance is likely to increase with US President-elect Trump's seeming determination to tax US consumers of imported goods.
Import prices do not reflect the effect of trade tariffs. The import price is the price to which the tariff is then applied. The nature of goods imported means that import price inflation, excluding petroleum, certainly should be less than consumer price inflation.
Generally speaking, goods prices have a lower inflation rate than services, and import prices refer primarily to goods prices. So what will matter as US consumer taxes are applied is the extent to which US import price trends change. If there is more deflation than is normal, that implies that exporters to the United States are cutting margins to offset some of the effects of the taxes on US consumers.
Sources & References
How we cover this story