UBS On-Air: Paul Donovan Daily Audio 'Trade details'
The desk interprets recent UK economic data as a modestly positive signal, particularly in light of the stronger-than-expected GDP figures and revisions suggesting an improving economic backdrop. Per the full note from UBS, the manufacturing and services sectors experienced unexpected strength, although the construction sector showed weakness. Additionally, the trade dynamics are noteworthy, with a surprising uptick in precious metal exports indicating potential shifts in export patterns that could impact currency valuations moving forward.
What the desk is arguing
The desk positions the recent UK economic data as a positive indicator for the pound, leveraging insights from UBS that highlight stronger-than-anticipated GDP growth and significant revisions upwards. Particularly, the manufacturing and services indices outperformed expectations, which could bolster confidence in the UK economy.
Supporting this view, Donovan notes that the structural adjustments within the UK economy often lead to stronger-than-expected GDP revisions. The incremental value of export growth, especially in precious metals, could indicate resilience against global market fluctuations, positioning the UK favorably relative to its trading partners.
The alternative read would suggest that despite these positive numbers, the underlying issues, particularly in construction and limited external demand from the US, could temper broader confidence in the sustainability of growth. Investors should remain cautious of potential headwinds that might not be fully captured in initial data points.
Where it sits in our coverage
The desk's read aligns well with a broader stance that favors the pound, with a consensus target at 1.075, sitting comfortably within a range of 1.04 to 1.12. Specific targets from notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Given the current positioning, this desk call leans towards the higher end of the range as growth indicators emerge. The strength in services and manufacturing suggests that bullish sentiment on the pound could be warranted.
How other firms see it
Many firms appear aligned with the bullish outlook, viewing current UK data as a sign of economic resilience. These include jpmorgan and others who emphasize growth potential.
In contrast, firms like bofa maintain a more cautious approach, highlighting risks in external demand and domestic construction that may temper economic optimism. Traders should keep an eye on USD/GBP movements as they relate to ongoing economic sentiment shifts and potential BoE actions, as the pound's strength against the dollar will play a critical role in future positioning.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK GDP data shows unexpected strength, particularly in manufacturing and services sectors.
- 02Exports of precious metals exceeded market expectations, indicating shifts in trade dynamics.
- 03While overall growth is positive, construction sector weakness signals caution.
- 04Consensus target for GBP/USD is at 1.075, indicating potential for upward movement.
Market implications
Watch GBP/USD levels around 1.075 as potential breakpoints for sustained bullish sentiment. Upcoming trade data from Europe could further influence market perceptions and positioning ahead of the next BoE meeting.
Risks to this view
A weakening construction sector and lower export growth to significant markets like the US could create headwinds. Persistent inflationary pressures or policy missteps by the BoE might also necessitate a reassessment of growth expectations and currency positioning.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 15th of January.
The United Kingdom did a small data dump. The trade data is not that exciting. But it did show a lot more exports of precious metals than the market had been anticipating.
And revisions increased those exports in October too. Silver price movements may have contributed to this. Exports to the United States fell on lower pharmaceutical exports.
But, as is repeatedly becoming a trend, exports to other countries, notably the European Union, improved. UK monthly GDP data rose and the previous month's data was revised higher. The UK often revises data stronger because structural change in the UK economy means it's easy to miss the growth story.
Having said that, monthly GDP is the economist's equivalent of white noise. Something in the background to help one sleep. Manufacturing and industrial production and services output were stronger than expected with positive revisions.
And only the construction sector was a disappointment. Europe offers its November trade data today. There should be confirmation again that trade outside of the United States is performing more or less normally.
The US is providing some sentiment surveys that can be ignored. And November import and export price data. No one really cares about the price of US exports.
Import prices are more important because they come pre-tariff. And so signal whether there is any chance of the tariff burden being borne by businesses outside of the United States. The evidence to date is that this is not happening.
Of course, these numbers need to be considered against long-term trends and global trends. If global prices are falling or if the product is one that is naturally deflationary, a price decline does not indicate burden sharing. There is some limited data relating to October to be released.
But given the problems the US is having with data quality outside of the government shutdown period, this is probably not going to be taken too seriously by financial markets. The US administration announced tariffs on imports of chips for re-export overnight. The news that European countries are sending troops to Greenland, in what is being interpreted as a signal of intent to defend against hostile takeover, has two market-relevant implications.
The first is that this will cost money. The defence spending increases in Europe are likely to be an ongoing feature of fiscal policy. The second is that it has to be assumed that the share of European defence procurement spending that is going on US-manufactured armaments is likely to fall more rapidly than it was already doing.
US President Trump said they had received assurances that protesters were no longer being killed in Iran. There is no indication of the source of that information. Trump's announcement did change the tone in the region after rising tensions in the wake of the US beginning to evacuate troops from its base in Qatar.
The oil market has interpreted this as lowering the risk of US military strikes against Iran, and oil prices have fallen a little over 3% in response. This is not a significant move in economic terms. 3% changes in crude oil translates into very little change in consumer prices, for instance. That's all for today.
Have a good day. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
This material is for your information only, and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS.
Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story