UBS On-Air: Paul Donovan Daily Audio 'Trying to change perceptions'
Per UBS's State of the Union analysis, the defensive tone and domestic focus suggest Trump is sensitive to falling approval ratings, which could presage policy shifts on tariffs. The desk sees this as a signal for USD vulnerability if protectionism escalates. Consensus EUR/USD year-end targets average near 1.08, with a wide dispersion from 1.04 to 1.12. The lack of imminent high-impact data leaves the market to focus on administration rhetoric, with next week's ISM manufacturing print as the key near-term catalyst.
What the desk is arguing
UBS Chief Economist Paul Donovan argues that Trump's State of the Union was a defensive reset of the economic narrative, reacting to sliding approval numbers. Per the full note , this sensitivity raises the odds that the administration leans into tariff policy to shore up domestic support, a shift that would have clear FX implications.
The desk draws a contrast between consumer sentiment (GFK dropping) and actual consumption (data revised higher), suggesting hard data still supports the euro area. The German GDP revisions confirm a steady consumer backbone, even as the population drag remains structural. The alternative read—that the approval-linked policy risk is already priced—is implicitly rejected given the event's proximity to new tariff announcements.
Key takeaways
- 01Trump's domestic focus reflects approval concerns, elevating tariff risk.
- 02Euro-area consumer hard data diverges from soft surveys, underpinning EUR floor.
- 03German GDP revisions confirm consumer-led stability despite demographic headwinds.
- 04Calendar is light—focus shifts to administration signals and next week's ISM data.
Market implications
Watch EUR/USD for a break above 1.0850 if tariff rhetoric escalates, targeting 1.10. The lack of near-term data puts a premium on C-suite comments from US Trade Representative and Treasury Secretary.
Risks to this view
A strong ISM manufacturing print next week would validate Trump's domestic narrative and reduce tariff urgency, unwinding EUR/USD gains. Alternatively, dovish Fed minutes could weaken the dollar through a separate channel.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 25th of February. US President Trump's State of the Union Address was essentially defensive, seeking to reset the narrative around the policies and economic performance of the past year.
As such, there's little for markets to get very excited about. One might perhaps say that so much of a focus on the economy suggests a sensitivity to the President's recent approval ratings and that the economic perception may dictate future policies. That could have relevance in areas like tariffs for instance, but it's a rather vague idea and markets are not likely to react until they see if senior members of the administration endorse further policy change.
German revised GDP data for the fourth quarter is not terribly exciting, although it is perhaps worth acknowledging that Germany is not doing too badly for an economy with a falling population these days. The headline growth rates were left unchanged. The consumer has in fact been a steady support for economic activity once the consumption data is revised to match reality, away from the pessimistic bias that seems to haunt so much of Germany's initial data releases.
Third quarter consumer data was revised higher, fourth quarter consumer data was revised higher and the monthly retail sales data is nearly always revised higher. However, the GFK consumer sentiment opinion poll was revised lower for February and fell for the March reading against expectations for an improvement. It is again a reminder that what consumers say they are feeling and how consumers consume are not exactly the same thing.
The euro area is offering some non-market moving data. The final euro consumer price inflation estimate for January is very unlikely to be even acknowledged by investors. So rarely does it change from the initial number.
It is perhaps worth noting that euro area aggregate consumer prices fell in January relative to December. Prices actually declined, albeit in a month-on-month basis. This is something that has not happened in the United States over the past year or indeed at any time since the pandemic.
According to China's official news agency, VAT receipts increased 13.7% for consumer-related industries during the spring festival holidays. However, the holiday itself was 29% longer. Two days were added this year compared to last year.
That rather blurs whether or not there was a more sustained improvement in consumer spending. Domestic tourism spending seems to have been stable per person, adjusting for days. While this data is not conclusive, it does tend to point to China's growth remaining more export-driven than domestic demand-driven, at least for now.
That in turn puts emphasis on China's exporters helping their US customers to find ways of avoiding or minimising tariff payments. That's all for today. Have a good day.
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