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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
The ongoing confusion surrounding U.S. trade tax policy, particularly from President Trump, is dampening investor sentiment and could have significant implications for inflation and consumer prices. Per the full note from UBS, Trump's remarks on delaying taxes for imports from Mexico and Canada have left markets uncertain, especially since higher taxes would burden consumers directly at a time of declining approval ratings for his economic policies. This situation can create volatility in the U.S. dollar, especially should inflationary pressures materialize, as the market assesses the likelihood of higher consumer prices from tariffs on European goods and autos. While the immediate calendar lacks key events, the upcoming GDP data release could shed light on broader economic health, further influencing market expectations around these trade policies.
The desk posits that the mixed messages from the Trump administration regarding trade taxes are likely to heighten market uncertainty and could lead to inflationary pressures in the U.S. economy. As per UBS's insights, consumer goods could see price increases if trade tariffs are enacted, particularly affecting perceptions of the administration's economic management at a politically sensitive time.
Moreover, the distress signals from Trump—who has historically relied on emotional messaging related to tariffs—suggest ongoing volatility in U.S. trade policy. The potential inflationary impact of these tariffs could result in backlash from consumers already facing price pressures, characterized by rising costs in staple goods. The visible effects on inflation would likely feed back into financial markets, particularly influencing the value of the dollar in a reactive manner.
Our current coverage consensus for the EUR/USD stands at a target of 1.075, within a range of 1.04 to 1.12. Notable projections include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's view aligns with jpmorgan, suggesting caution and potential movement towards the higher end of the forecast range as inflationary fears mount. However, it starkly contrasts with bofa, which maintains a more cautious stance given the bearish outlook on the dollar amid global economic uncertainties.
Firms like jpmorgan and citi generally see the potential for dollar depreciation amid possible inflationary pressures transitioning from trade policies. On the contrary, bofa remains skeptical, advocating for a more bearish view on the dollar.
Key currency pairs to monitor include EUR/USD, especially in relation to the upcoming U.S. economic data, as well as USD/JPY, which could reflect shifts in risk sentiment arising from trade developments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Investors should pay close attention to the impending U.S. GDP data release, which may offer insight into how trade policies are affecting economic conditions. A movement above the 1.075 level in EUR/USD could signal growth concerns as inflation fears take root, while any significant deviation from expected GDP growth could sway sentiment further.
Risks to this view
The primary risk to this outlook arises from a decisive pivot by the Trump administration toward more stable trade policies, which could mitigate inflation expectations. Additionally, a robust rebound in approval ratings for his economic policies could suggest decreased likelihood of further tariff initiatives, thereby stabilizing consumer price expectations.
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 27th of February. U.S.
President Trump has expressed some confused views about how much more the U.S. taxpayer burden is set to rise, and this may add to market confusion. During yesterday's Cabinet meeting, Trump signalled that they would delay taxing U.S. consumers of Mexican and Canadian imports until the start of April. The White House then clarified that the President had meant to say they'd not decided whether to retreat on tax policy again.
Repeated retreats from trade taxes would not be a surprise to anyone. Such taxes would be highly visible to U.S. consumers, and clearly demonstrate that it is indeed U.S. consumers and not exporters that pay trade taxes. At a time when Trump's approval rating for handling the economy and inflation has been declining, very obviously initiating an inflationary policy is not politically appealing, hence repeated retreats.
There was also a threat to tax U.S. consumers of European products. Trump's remarks on this point were somewhat incoherent, but either all European imports or imports of just cars were threatened with a 25% tax. Trump seems to have a strong emotional attachment to taxing U.S. consumers by 25%.
It's a number that comes up with surprising regularity. Again, investors are not likely to believe Trump about taxing all European imports into the States. The visible effects of that on consumers would be considerable.
Olive oil and other products would join eggs prices in leaping skywards. A tax on European autos is more plausible, though that could lead to some second-round effects on U.S. inflation. Higher imported auto prices might encourage higher prices from domestic auto producers and would almost certainly push up second-hand car prices and auto insurance prices in the fullness of time.
Devised fourth-quarter U.S. GDP is due and with the financial markets no longer looking for a change from the initial reading. That does include stability in the core PCE deflator, which has been dragged higher by government-controlled and calculated prices.
It was 2.8% year-over-year in the fourth quarter on the core rate. When market forces determine prices, the core PCE inflation rate was just 2.4%. Other inflation data comes in the form of Spanish preliminary February consumer price inflation figures.
Energy prices are pushing up the headline number here. The core inflation measure should remain comfortably within a normal range around 2% year-over-year, although there are too few forecasts for that particular number to make the market consensus anything sensible. So media comparisons to market expectations for core inflation should be treated with considerable caution or, better yet, just ignored.
That's all for today. Have a good day. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate UBS.
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