UBS On-Air: Paul Donovan Daily Audio 'Uncertainty hits forecasts'
The desk believes that the current state of the U.S. dollar reflects ongoing uncertainty stemming from erratic fiscal policies, contributing to its proximity to recent lows against major currencies. Per the full note from UBS, the market is grappling with concerns over incomplete policy retreats, amplifying investor anxiety. While the U.S. economic data expected today, such as consumer confidence and durable goods orders, may not significantly alter market perceptions, they illustrate the broader environment of political partisanship that could cloud the economic outlook. As such, the dollar's performance is expected to be closely linked to these upcoming releases and political developments.
What the desk is arguing
The desk positions that the U.S. dollar is under pressure due to persistent political and economic uncertainties that continue to plague investor sentiment. The volatility introduced by extreme policy announcements and subsequent retreats signals that the market remains on edge regarding the sustainability of current economic practices. According to UBS's analysis, the dollar's weakness is compounded by the expectation that consumer confidence reports might be swayed more by media coverage than economic reality.
Supporting this perspective, the upcoming durable goods orders for April are anticipated to deliver mixed signals, reflecting gradual shifts in consumer behavior away from goods towards services. UBS mentions that this trend raises pointed questions about manufacturing resilience amid ongoing tariff uncertainties, which further complicates the economic landscape.
Where it sits in our coverage
At present, our consensus target for the EUR/USD pair stands at 1.075, with a range of 1.04 to 1.12. Notably, jpmorgan has aligned its target at 1.10 for March 26, while bofa maintains a contrary position with a lower target of 1.04 for the same tenor.
This viewpoint aligns with broader market sentiments, as the desk's forecast occupies a position closer to the upper end of the prescribed range, suggesting a more optimistic outlook for the euro against the dollar than some peers.
How other firms see it
Firms such as jpmorgan are aligned with our perspective, citing similar concerns over dollar weakness driven by political uncertainties. In contrast, bofa holds a fundamentally different outlook, favoring a more pessimistic stance on dollar performance based on potential economic downturns.
Given the current focus on U.S. economic indicators, the trajectory of the EUR/USD pair will likely reflect underlying confidence in upcoming consumer data and political developments, aligning directly with central bank sentiments around inflation and economic recovery.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. dollar weak due to persistent economic and political uncertainties
- 02Consumer confidence data may reflect media influences more than economic realities
- 03Durable goods orders expected to show mixed signals amidst tariff uncertainties
Market implications
Watch the upcoming consumer confidence data and durable goods orders closely, as they are likely to provide insights into economic sentiment and may influence the U.S. dollar's near-term trajectory. Key levels to watch are 1.075 resistance and the psychological level of 1.10 in the EUR/USD pair.
Risks to this view
A notable risk to this outlook would be if upcoming economic data surprises positively, indicating stronger-than-expected consumer sentiment or manufacturing resilience, potentially reversing the current bearish sentiment on the dollar. Additionally, any decisive political maneuvers reducing uncertainty could bolster the currency.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6 o'clock in the morning London time on Tuesday the 27th of May. Global markets are still clearly exhibiting some concerns about the general situation in the United States.
This is one of the problems with announcing extreme policies and then retreating. The process still raises a concern that the retreats may not be comprehensive and that economic behaviour will have to change anyway to accommodate the wild policy swings. Thus, even though there has been no new information, aside from some comments from the EU about accelerating trade negotiations, the dollar remains near its lows for key currency pairs.
The economic data today is not going to add a great deal to investors' understanding of where things are going. There is a range of confidence data from the United States, but the main point here is the demonstration of political partisanship. The May consumer confidence data is more likely to be driven by the cable news network of choice for the respondents than it is by anything in the real-world economy.
The Dallas Fed Manufacturing Survey does offer the ever-entertaining comments section and this will capture the Liberation Day or Serfdom Day announcements on trade taxes and then the subsequent retreat. So to that extent, it gives some insight into how companies report feeling about uncertainty as well as their views on policies per se. In terms of hard data, there are U.S. consumer durable goods orders figures for the month of April.
This frankly will be messy. There is the consumer trend towards having fun and away from spending on goods, which has been in place for a couple of years. There is the factory building boom of the past three years, which slowed noticeably in the first quarter of this year, but factories that were built in the past will still require equipment today.
And then there is the uncertainty about tariffs and, in this case, the risk of retaliatory tariffs. And overseas customers of U.S. durable goods seek to stockpile before the trade war escalated too far. Markets are looking for weakness in today's data, but the range of forecasts for durable goods orders ex-transport is the widest it has been for over two years.
Europe is offering less drama. French consumer price inflation data for May is due and this is the first major European inflation data for May. The inflation rate in France is already pretty low and markets are not really expecting a great deal of change in the numbers.
Meanwhile, the UK's British Retail Consortium reported rising inflation for food prices but ongoing deflation for non-food items in its survey. The overall effect is therefore modest deflation. There is a political agenda that seeks to put the blame on changing tax rates as a cause of higher prices, but it's worth remembering that in terms of labour costs, food and non-food stores face the same sort of expenses, albeit producer prices for durable goods are certainly more likely to be declining at the moment.
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