UBS On-Air: Paul Donovan Daily Audio 'Trade taxes and the US Treasury'
The desk interprets recent comments from US Treasury Secretary nominee Bessent, emphasizing a concerning misunderstanding of trade tax economics, especially regarding currency appreciation's role in offsetting tariffs. This misalignment highlights potential inflationary pressures which could impact the USD and its major pairs. According to the consensus targets, EUR/USD is trading at 1.1434 with a median forecast of 1.1750 for December 2026. Per the full note source, the market is left to navigate how these administration policies might influence currency valuations moving forward.
What the desk is arguing
The desk asserts that Bessent's views on trade tax implications may reflect a broader underestimation of economic realities, specifically that currency appreciation does not adequately cushion the inflationary impact of such taxes. Per the full note source, this could exacerbate inflation pressures, leading to potential volatility in USD-cross pairs.
The concern over rising prices due to trade taxes links back to the responses during Bessent's confirmation hearing, indicating a disconnect between theory and practical outcomes. The desk emphasizes that the ongoing market reaction may depend significantly on how the administration's trade policy evolves and influences economic indicators, notably inflation.
Where it sits in our coverage
Consensus sees EUR/USD currently at 1.1434. Forecast ranges for December 2026 stand at a median of 1.1750, with notable targets from firms such as ubs at 1.2000, deutschebank at 1.2500, and citi at 1.1300.
The desk's assessment is moderately bullish compared to the lower-end forecasts from citi and reflects an alignment closer to ubs's higher projection, suggesting a potentially robust euro against the dollar, especially if inflationary pressures from trade actions materialize as anticipated.
How firms align with this view
Key takeaways
- 01Bessent's understanding of currency appreciation's impact on tariffs is questioned.
- 02The desk anticipates potential inflationary effects from proposed trade taxes.
- 03Current EUR/USD sits at 1.1434, against a December consensus of 1.1750.
- 04The market's interpretation of administration policies could lead to volatility in currency pairs.
Market implications
Investors should closely monitor the EUR/USD level at 1.1750 as potential inflation data and trade policies could impact this trajectory significantly. Also, positioning shifts in USD/JPY could reflect broader market reactions to ongoing trade discussions.
Risks to this view
A reversal in this outlook could occur if the incoming administration clarifies or alters its position on trade policies, particularly if they signal reduced trade tax implementations, which would alleviate inflationary pressures and bolster the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 17th of January. As an economist, watching the confirmation hearings for US Treasury Secretary nominee Besant was interesting.
Besant is one of the more orthodox nominations for a cabinet position and gave a generally articulate set of answers on a range of issues. On the economic consequences of trade taxes, however, the answers were more troubling. Certainly, Besant does appear to favour trade taxes purely as a bargaining tool, not as being a good thing in themselves.
But some of the answers on the inflation implications are troubling. The idea that currency appreciation can limit the effects of a trade tax is not really supported by the recent evidence. And the idea that workers will not pay higher prices as both a direct and an indirect result of what amounts to a sales tax is questionable.
Presumably, Besant is aware of how sales taxes work and so the concern is that the disregard for the economics of trade taxes is reflecting the approach of the incoming administration overall, overruling the presumed understanding of the Treasury Secretary nominee. According to the official government data, China's economy grew at 5% in 2024. 5% was the official government target for growth. Economists are perhaps not entirely surprised that the official government data has met the official government growth target.
Academics in the past have suggested that China's economy and by extension its growth is about two thirds the size of the official figure. But even a growth rate of around 3% would still mean rising living standards in China because the population continues to fall, implying a lower trend rate of growth over time, incidentally. Does an abstract concept like GDP actually matter very much to the financial markets?
Not really. Investors are interested in the reality of what China is doing and how it interacts with the rest of the world. A smaller China which actively consumes foreign goods is more globally important than a larger China that is a relatively closed economy.
UK December retail sales data saw very weak food store sales but general strength elsewhere. That pattern is not really consistent with the idea of consumers cowering at home out of fear of the recent budget. A rather serious seasonal flu may have weakened some spending behaviour, but the seasonal adjustment process does take into account the flexible timing of the Black Friday shopping hype.
After a week of excitement in the fixed income markets in the UK, with bond yields having dropped 0.2% or so, Bank of England Governor Bailey is set to speak today. The UK economic outlook hasn't really altered very much in the last three months. There's a lot more grouching from businesses, but that seems to be spin with no substance behind it.
Sources & References
How we cover this story
Related news on this pair
Euro: Further gains eyed toward 1.1800 against US Dollar – UOB
EUR/USD technical target of 1.1800 suggests directional bias toward euro strength; traders should monitor resistance levels and macro catalysts driving momentum.
EUR/USD Price Forecast: Corrects further as US Dollar extends recovery
USD strength momentum extends EUR/USD correction, likely testing technical support levels watched by systematic traders and hedge funds.
Morning briefing: EUR/USD is expected to regain momentum above 1.1700
Technical break above 1.1700 may attract momentum flows; watch for ECB/Fed divergence confirmation to validate further EUR/USD upside.