UBS On-Air: Paul Donovan Daily Audio 'The Middle East lockdown'
The desk interprets the developments surrounding the Federal Reserve as a significant risk factor for the USD, particularly in the wake of President Trump's comments about possibly dismissing Chair Powell. Per the full note source, the blockage of Powell's potential successor, Walsh, by Senator Tillis underscores the political entanglements that could threaten Fed independence, a sentiment echoed across markets. Evidence from ongoing FOMC deliberations suggests that Powell's continued leadership may support more aggressive rate cuts, influencing trader positioning and sentiment going forward.
What the desk is arguing
The Federal Reserve's independence emerges as a pivotal theme as President Trump voiced intentions to potentially fire Chair Powell amid ongoing investigations. This uncertainty, coupled with the blockage of Walsh's confirmation, places heightened scrutiny on US monetary policy, especially regarding interest rates. As noted by Donovan, Powell's leadership might facilitate a case for rate cuts more so than Walsh would, given the current political landscape.
Market reactions hint at a lack of willingness to price in a significant challenge to Fed independence; however, the dynamic could shift if policymakers perceive an imminent threat to their autonomy. The debate among FOMC members regarding rate cuts is now potentially colored by these political developments, which could impact the timing and scale of any moves later this year.
Where it sits in our coverage
Our current consensus target for the USD/CAD stands at 1.075, with a range of 1.04 to 1.12. Notably, J.P. Morgan targets 1.10 for March 2026 while Bank of America’s forecast lags at 1.04 for the same period.
The desk's interpretation aligns closely with jpmorgan, which anticipates a firm USD in the medium to long term, while sitting at the higher end of the pricing spectrum compared to bofa, signaling caution on the potential rate cuts influenced by political uncertainties.
How other firms see it
Many firms, including jpmorgan and barclays, foresee a stable outlook for the USD amidst ongoing Fed deliberations. In contrast, bofa and citi express more cautious positions, forecasting bearish scenarios for the dollar trajectory predicated on political interventions.
Given the current volatility surrounding Fed leaders, watching USD/CAD could be prudent, especially as the currency pair reflects the complex interrelations of US monetary policies and Canadian economic developments as influenced by global factors.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's potential intervention in Fed leadership raises independence concerns.
- 02Ongoing blockage of Walsh's confirmation could alter future rate cut timelines.
- 03Powell's authority might favor aggressive rate cuts amid political pressures.
- 04Market sentiment currently underestimates risks to Fed's operational autonomy.
Market implications
Traders should keep an eye on USD/CAD around the 1.075 level, particularly if political tensions escalate further. The outcome of discussions and debates among FOMC members could significantly shape trading strategies as we approach potential policy shifts in the coming months.
Risks to this view
Should President Trump proceed with dismissing Powell or successfully push through the nomination of Walsh, the implications for Fed policy could be substantial, potentially leading to increased volatility in the USD. A divergence between political rhetoric and actual Fed actions would also necessitate a reassessment of current market positioning.
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 16th of April. In the course of a television interview yesterday, US President Trump indicated a determination to fire US Federal Reserve Chair Powell, should Powell become Chair of the Board of Governors pro tempore after May.
Trump also indicated that the legal investigation of the Federal Reserve would continue. This makes it unlikely that Fed Chair nominee Walsh will be confirmed any time soon. Republican Senator Tillis confirmed that Walsh's nomination will be blocked while the investigation into the Fed continues.
And despite some apparent confusion on the part of Trump, Tillis is still very much a member of the US Senate, with the personal ability to block Walsh's nomination. Whether Trump could fire a pro tempore chair of the Fed is unclear, but also a little academic. The FOMC, the committee which actually decides interest rates, pick their own chair, with no reference to any authority outside of the committee.
Critics are not inclined to worry too much about the possibility of a challenge to the independence of the Fed, and assume that Powell will continue to lead policy until such time as Walsh is finally confirmed. However, there is a possible policy angle to all of this noise. Given their relative reputations within the Federal Reserve, Powell might find it easier to convince colleagues of a need to cut rates than will Walsh, assuming that there is a debate about the desirability of rate cuts.
Thus, the number of rate cuts this year may depend on how long Powell remains as chair of the FOMC. The Financial Times reports that a number of Gulf states have been borrowing money privately to support their economies during the war. The impact of the war on the Gulf states is not too dissimilar to the economic impact of the pandemic on the global economy.
A key part of economic activity has just ceased. Effectively, the Gulf oil and gas industry is in lockdown because of Iran's closure of the Strait of Hormuz. The fiscal spending that is being used to offset the fiscal damage, and which will have to be raised to pay for reconstruction and rearmament after the war, is something that will require funding, borrowing for now with diversion of oil revenues and possibly drawing on the resources of sovereign wealth funds in the future.
Globally, the questions that matter are to what extent Gulf sovereign wealth funds sell assets to pay for rebuilding, and more importantly, where the reconstruction and rearmament budgets will be spent. If there is a skew to spending in Europe and Asia, that then has implications for the longer-term direction of the US dollar. China's officially reported first quarter GDP beat expectations, growing in line with the official growth target range with a 5% reading.
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