UBS On-Air: Paul Donovan Daily Audio 'Tariff affordability'
Lead — The desk emphasizes the potential implications of the 15% tariff proposed by the U.S. administration on importers, noted by Treasury Secretary Besant, and how this impacts inflation perceptions in a U.S. context. According to the analysis, while this tariff may not substantially raise inflation, it influences affordability narratives across households. Per the full note from UBS, this evolving tariff landscape aligns with existing market expectations and financial models, suggesting traders should be poised for further fluctuations in related currency pairs.
What the desk is arguing
The desk is focusing on the U.S. Treasury Secretary's announcement regarding a potential increase in tariffs to 15%, reinforcing earlier statements by President Trump, which adds credibility to market expectations. Per the full note from UBS, while the tariffs might not heighten inflation dramatically, they are likely to affect public perception of inflation, leading to implications for consumer behavior and purchasing decisions.
As reported, despite a historical context of tariffs generally being shifted onto consumers, the current economic narrative around affordability could keep inflationary pressures lingering longer than anticipated. Key indicators such as gasoline prices have shown unusual volatility recently, adding to the discourse around inflation expectations among households.
Where it sits in our coverage
For the EUR/USD pair, our consensus target stands at 1.1700 with a range from 1.1200 to 1.2000. Notably, several firms have outlined their respective forecasts, including Deutsche Bank and Barclays, who target 1.1800 and 1.1700 for March 2026 respectively.
This desk's narrative largely aligns with the cross-firm consensus, though it leans towards the elevated expectations shared by deutschebank and bofa, both expressing views that correspond closely with the anticipated direction of inflation's narrative shift influenced by trade policy.
How other firms see it
Aligned firms like mufg and barclays share a similarly bullish outlook on the EUR/USD trajectory, forecasting around 1.1800 by March 2026. Conversely, firms like uob and anz appear to have a more cautious stance, capturing lower targets of 1.1536 and 1.1506 respectively, reflecting concerns over the effects of the tariff narrative on consumer pricing dynamics.
The affectation of U.S.-China trade negotiations intersects with this thesis; an escalating trade war could deter consumer spending and further sway market perceptions of inflation. Tracking movements in the USD/JPY may also provide additional insights on the overall market sentiment regarding tariffs and their economic fallout.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 0115% tariff announcement could reinforce inflation perceptions.
- 02Consumer spending may be influenced by evolving affordability narratives.
- 03Potential discrepancies remain among firms on currency predictions.
- 04Observing gasoline price fluctuations could provide insight into market sentiment.
Market implications
Traders should watch for movement around the EUR/USD level of 1.1700, particularly as public sentiment shifts due to tariff announcements. Positioning across related currency pairs, especially USD/JPY, could hint at broader market reactions to the U.S. import policy change.
Risks to this view
The anticipated call may be invalidated if the upcoming import price data indicates a larger-than-expected impact on inflation, pushing the market to reconsider the tariff’s effects. Additionally, any shifts in administration policy could reshape expectations dramatically, particularly in relation to global trade dynamics.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning, London time, on Thursday the 5th of March. U.S.
Treasury Secretary Besant has said that it is likely U.S. importers will be required to pay a 15% tariff by the end of the week, up from the current 10%. U.S. President Trump had already declared a 15% tariff, but having a member of the administration back that up gives credibility to the threat.
Investors had assumed a 15% tariff as at least a scenario in their models, so this is something markets should be more or less prepared for. In terms of the economics, it is unlikely that a 15% near-universal tariff will add to inflation over and above what the illegal IEPA tariffs had added. However, because the structure of tariffs have changed, and tariff reductions are rarely passed on to consumers in the way that tariff increases are, this might conceivably keep inflation at a higher rate for a bit longer.
U.S. January import and export price data is due, but the narrative of tariff pass-through is already established, and this data is not therefore likely to tell us anything particularly new. The tariff increase comes at a time when the U.S. affordability crisis remains a focus for many U.S. households.
While this may not add to inflation, the narrative around inflation perceptions might be affected by this. Affordability is about inflation perceptions rather than inflation reality, and that means that there is a disproportionate emphasis placed on high-frequency purchases. While gasoline prices have been rising, by Monday they were already up by roughly $0.07 a gallon, and there are reports of a very large and very unusual spike in the last couple of days of almost $0.20.
That suggests some opportunistic profit-led inflation may be coming through, as there is obviously a lag in producing refined oil products from crude oil. This too may add to the perception of inflation, although it's important to note that consumers are likely to keep on spending. The inflation reality means that spending power is not so seriously affected, at least at this stage, but with the threats of more tariffs and higher gasoline prices, there are plenty of things for U.S. households to complain about.
China's parliament has endorsed a growth target of 4.5% to 5%, which is the lowest for decades. The official growth target matters because China's officials know that the target must be reached, and the official growth outcome nearly always matches or exceeds the target. Lowering the target is therefore something that will affect behaviour within the government.
Sources & References
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