EUR/USD likely to find a peak near 1.25: UBS
Investing.com - Economists have warned that U.S. President Donald Trump’s aggressive tariffs could drive up inflationary pressures and weigh on broader economic activity -- however, reports this week have painted a picture of an American economy that seems to be on solid footing.
On Thursday, retail sales figures were stronger than anticipated, while weekly jobless claims came in below forecasts. Inflation also stayed broadly in line with expectations in June, although the tariffs seem to be pushing the prices of some goods higher.
A key August 1 deadline for Trump’s elevated "reciprocal" tariffs to take effect looms large, with the White House suggesting that some new agreements with individual countries could be coming before that date. So far, preliminary trade deals have been reached with a handful of nations, including the United Kingdom (TADAWUL:4280), China, Vietnam, and Indonesia.
Others, such as major U.S. trading partners like the European Union, have yet to reach a pact to avoid Trump’s heightened levies.
Adding to the uncertainty is the Federal Reserve, which has largely indicated that it will adopt a "wait-and-see" approach to future potential interest rate decisions due to murkiness around the levies’ impact on the wider economy. The tactic has received the ire of Trump, who has increasing called on Fed Chair Jerome Powell to lead a cycle of quick rate cuts.
Trump’s comments have triggered worries around the longstanding independence of the Fed, which have in turn roiled stocks and dented the U.S. dollar in recent days.
Against this backdrop, analysts at BofA suggested that there are four key themes for companies during the nascent second-quarter earnings season.
First, the analysts argue that U.S. policy risk premium, or the additional return investors demand for holding an asset during a time of uncertainty, is "well priced."
"We expect U.S. risk premium to stay elevated for some time yet but short-term dynamics may be influenced more by cyclical drivers, most importantly U.S. data leading up to the September FOMC meeting," the analysts said, referring to the rate-setting Federal Open Market Committee.
Next (LON:NXT), the uncertainty around the trade outlook is "rising again" as the August 1 deadline approaches, they said.
"The impact of trade headlines has waned since April. This may signal complacency, but also that tariff noise and deadline extensions tell us little about the likely endpoint."
However, a trade truce with the U.S. has helped to bolster China’s economic outlook, they said. As a result, their estimates for global growth are now "mildly better."
Elsewhere, beyond the U.S., long-end government bond yields are at risk of climbing in Japan if the country’s ruling coalition loses its majority in an upcoming Upper House election, the analysts flagged.
They recommended that investors "lean toward paying fixed rates," consider hedging short-term emerging market foreign-exchange exposure, and hedge yen risk.