UBS On-Air: Paul Donovan Daily Audio 'This green and pleasant land?'
Recent commentary from UBS highlights the implications of potential US tariffs related to Greenland and how they may affect consumers in the EU and UK. Donovan notes that these tariffs could lead to price increases of 4% to 10% for American consumers. This scenario poses a stark contrast to the ongoing affordability concerns the US administration is grappling with, revealing the tension in policy objectives. Per the full note source, the resulting uncertainty in the trade landscape also poses challenges for businesses, as many are still navigating the ambiguity of US policy. Traders should remain vigilant of how these developments might impact FX sentiment, particularly in relation to USD movements against major currencies.
What the desk is arguing
The desk posits that the anticipated US tariffs on goods from the EU and UK could significantly influence market dynamics, leading to price increases that strain consumer affordability. As discussed by Donovan, the tariff situation reflects broader policy conflicts within the US, potentially exacerbating economic pressures.
Supporting this view, Donovan suggests increases around 4% to 10% could emerge in the next six months, indicating a serious impact on consumption patterns in the US. This shift might not only affect consumer goods prices but also alter the competitive landscape for US businesses.
The alternative perspective could be that positive developments in the domestic economy might mitigate these effects, or that the tariffs might not be implemented at all, creating room for a differing market reaction. However, the weight of current geopolitical tensions suggests traders should brace for volatility.
Where it sits in our coverage
Our current consensus target for the USD/EUR pair is 1.075, with a range spanning from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) This view is aligned with jpmorgan's higher target, indicating a potential bullish trend against bofa's more bearish outlook sitting at the lower bound of the range.
How other firms see it
Firms such as jpmorgan and citi share a relatively positive stance on the dollar, reflecting confidence in its stability amid tariff-related uncertainties. Conversely, bofa advocates for a more cautious approach, leaning towards bearish positioning.
Traders should monitor the USD/EUR pair closely, as its trajectory could correlate with evolving perceptions of US consumer prices and overarching tariff impacts. This currency pair will be crucial to watch, especially in the context of potential policy shifts from the Federal Reserve.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Potential US tariffs on goods from the EU and UK may lead to price increases of 4% to 10% for American consumers.
- 02This tariff scenario contrasts sharply with ongoing affordability issues, demonstrating policy tensions in the US.
- 03Policy uncertainty remains a significant concern for businesses, potentially affecting their investment and hiring decisions.
- 04Traders are advised to stay alert to how these geopolitical developments may influence FX market sentiment.
Market implications
Traders should focus on the potential volatility of the USD/EUR pair, especially as sentiment shifts in response to perceived tariff impacts. Watching for price movements near key support and resistance levels will be crucial as these geopolitical dynamics unfold.
Risks to this view
A reversal of this call could occur if the US Supreme Court blocks the proposed tariffs or if economic indicators show unexpectedly strong resilience in consumer spending, alleviating fears of rising prices.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Monday the 19th of January. The US administration's actions over Greenland, endorsed by Russian President Putin, obviously create dramatic geopolitical headlines.
They also have market relevance in four key areas. The threatened new tariffs appear to be taken more seriously than those that were threatened on buyers of goods from countries that trade with Iran, about which no details have been given and which, if taken to be credible in any way, would imply to imports from pretty much every country, except perhaps the penguins of the Heard and Macdonald Islands. It's not clear that these tariffs will be legal and the Supreme Court ruling on this matter now assumes additional urgency.
However, taken at face value, US consumers will have to find 4% rising to 10% more money to buy things from the EU and the UK within about six months. That seems to run counter to the US administration's concerns about the US affordability crisis, but that very neatly encapsulates the problems with single issue politics. If the single issue in focus is affordability, charging US consumers higher trade taxes is a bad idea.
If the issue is, I want Greenland, then the policy action may run counter to resolving the affordability crisis. As ever, it is the narrative that matters here and there is a risk that future US price increases from whatever cause will be blamed on this tariff policy. There is also the issue of policy uncertainty.
Uncertainty seems to have been a constraint on US businesses in 2025. Non-AI investment has been weaker and hiring has been very weak. However, firms cannot remain paralysed by policy uncertainty indefinitely and there were hopes that this would fade and firms would start to adapt to a world with less direction.
Mild changes to tariff policy would probably have been overlooked by firms keen to adapt. This feels somewhat bigger and may reignite a wait and see approach by US companies which would reduce the potential upside risks for the US economy. European retaliation is the subject of speculation at the moment.
There are various mechanisms for imposing tariffs or restrictions on US exports to Europe. Europe has abstained from these so far, reflecting the fact that tariffs, reciprocal or otherwise, can often do more damage to the domestic consumer than to foreign firms. The US is not a major exporter, limiting the potency of reciprocal tariffs.
However, targeted restrictions, already discussed for other reasons against US social media companies, for instance, might inflict pain on the United States. The most potent issue is whether Europeans would be willing to support the US bond market with quite so much enthusiasm in the future. Care is needed here, as US data on foreign bond holdings does not actually report the country of the decision-making investor, just the last port of call before money entered the United States.
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