UBS On-Air: Paul Donovan Daily Audio 'Perceptions on the cost of war'
At a Glance
The desk contends that current US geopolitical uncertainty, particularly regarding the Gulf, is creating volatility in FX markets, especially in the USD pairs. Per the full note from UBS's Paul Donovan, conflicting statements from US officials about the Gulf conflict suggest that US economic stability, despite being touted as an oil exporter, is under threat due to potential emergencies that could require aggressive monetary policy responses. This ambiguity could further weaken the USD in the near term, influencing pairs such as EUR/USD and GBP/USD amidst rising oil prices and consumer apprehension, particularly as US consumers adjust their spending habits to cope with higher costs.
Key Takeaways
- 01Political uncertainty in the US regarding the Gulf could weigh on the dollar's strength.
- 02Conflicting statements from US officials highlight a lack of coherent strategy, potentially destabilizing USD.
- 03Higher oil prices may pressure US consumers, influencing spending and economic stability.
- 04Cross-market dynamics with EUR/USD and GBP/USD may evolve based on consumer sentiment and geopolitical risks.
Full Analysis
What the desk is arguing
The desk believes that the current discord within US government statements surrounding the Gulf conflict signals potential lingering risks for the USD. Donovan highlights how Treasury Secretary Bessent’s initial denial of mining activity in the Strait of Hormuz later shifted to a more ambiguous acknowledgment, reflecting uncertainty that could influence FX market behavior.
Additionally, the call for an emergency rate cut from President Trump brings into question the overall health of the US economy, despite claims of robust export capabilities. If uncertainty persists, the USD could face downward pressure against currencies like the EUR and GBP, which are currently positioned amid fluctuating geopolitical narratives.
Where it sits in our coverage
The consensus target for EUR/USD currently stands at 1.1700, with a range of 1.1200 to 1.2000. Notable targets from firms include deutschebank at 1.1800 and mufg at 1.1800 for March 2026.
In contrast, the desk's view suggests potential underperformance for the USD, which could imply that the consensus remain optimistic, landing at the upper end of the forecast range. The focus is on how geopolitical developments could drive a divergence in USD performance against these expectations.
How other firms see it
Aligned firms are predominantly optimistic on EUR/USD, with projections from mufg, deutschebank, and bofa signaling potential strength against the backdrop of US uncertainty. Conversely, firms like citi and nomura suggest weakness in USD against GBP, reflecting differing views on the Fed's likely trajectory and its global ramifications.
Additionally, USD/JPY dynamics will be crucial as market players assess the interplay between US rate decisions and Japanese monetary policy, particularly in light of recent economic indicators following the Gulf developments.
Market Implications
Traders should closely monitor the EUR/USD levels, particularly around 1.1700, as geopolitical developments emerge. The volatility in the oil market could spill over into consumer confidence metrics, making upcoming data prints crucial for positioning ahead of any rate discussions from the Fed.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
From the original
The US government’s views on the Gulf war and its consequences seem to be contradictory. US Treasury Secretary Bessent said the Strait of Hormuz was not being mined—later clarified by officials to mean that it probably was. US President Trump asserted US strength as an oil produc
Related speeches
4 itemsUBS On-Air: Paul Donovan Daily Audio 'War and trade war costs'
The desk asserts that geopolitical tensions in the Gulf, particularly Iran's suspension of negotiations with the U.S., are injecting volatility into oil prices, which may influence broader market dynamics. Per the full note by Paul Donovan from UBS, the increase in oil prices is already imposing direct cost pressures on U.S. farmers, compelling the White House to reduce tariffs on agricultural equipment. Such adjustments, while immediate, do not provide relief for farmers facing war-related pricing challenges. The absence of significant upcoming economic events leaves traders to navigate these geopolitical undercurrents with limited guidance.
UBS On-Air: Paul Donovan Daily Audio 'Living in uncertain times'
The desk argues that current market volatility stems from conflicting messages coming from U.S. officials regarding their objectives in the Gulf War. This uncertainty complicates investors' ability to price risk accurately, as highlighted by UBS economist Paul Donovan, who notes that without clear objectives, progress—and thus the potential duration of the conflict—remains ambiguous. Market reactions have been observed as risk markets weakened following tensions between the U.S. and Iran, particularly surrounding the Strait of Hormuz. In light of this situation, traders should remain vigilant as the evolving geopolitical narrative continues to shape market conditions, especially in the wake of the weekend's incidents.
More from UBS ON AIR
5 items- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'D-day or Light Brigade?'
- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'Canada, Iran, and US affordability'
- UBS ON AIR
Signal over Noise: Navigating Scylla and Charybdis at Jackson Hole
- UBS ON AIR
Top of the Morning: CIO Equity Pulse - Monthly performance update & outlook