UBS sees Fed on hold as Warsh downplays inflation risk despite hike bets
At a Glance
The desk assesses that UBS's outlook on the Federal Reserve indicates a reduction in market expectations for rate hikes, positioning quality short- to medium-maturity bonds as attractive buys. UBS argues that the current elevated yields are mispriced relative to the diminishing inflationary pressures indicated by decelerating wage growth, a perspective that will frame discussions ahead of the next Fed meeting. Per the full note , UBS expects the Fed to maintain a steady rate stance, contrary to market pricing of two rate hikes over the next year. This reflects a shift in analysis amidst recent comments from Fed Chair Kevin Warsh that have added uncertainty to policy direction.
Key Takeaways
Full Analysis
What the desk is arguing
The desk believes that markets are currently overestimating the likelihood of subsequent Fed tightening based on UBS's latest assessment. The commentary highlights the disparity between strong job numbers and softening wage growth, suggesting that the labor market is not generating inflationary pressures sufficient to necessitate further rate hikes, positioning UBS's perspective as a critical influence on trading sentiment in the coming weeks.
The market is currently pricing in two 25-basis-point rate hikes over the next 12 months; however, UBS views this stance as overly aggressive. Their analysis suggests that the unwinding of tariff impacts could reduce inflation trends significantly, bolstering their case for maintaining a stable rate environment.
Where it sits in our coverage
For the EUR/USD, our consensus target is 1.1700, with a range of 1.1200 to 1.2000. Notable forecasts include ubs at 1.2000 and hsbc at 1.1700 for Dec-26.
This aligns with UBS's view of a stable Fed policy, as they are at the upper end of the current consensus, reinforcing their positioning in the market with the assumption of steady yields ahead. For the GBP/USD, our consensus is 1.3400 and for the JPY 155.0000, demonstrating distinct divergence compared to the Fed-focused commentary on bond positions.
How other firms see it
Several firms, including ubs and scotiabank, share a bullish outlook on the Fed holding rates steady, aligning with UBS's analysis. Conversely, firms such as citi and goldman exhibit more aggressive rate hike expectations, highlighting differing views on monetary policy.
Expect close monitoring of USD/JPY trends as they will be influenced by Fed decisions, alongside potential volatility in EUR/USD, given their ties to ECB rate paths and market sentiment shifts.
Market Implications
Traders should focus on upcoming economic indicators that might influence Fed policy, particularly shifts in wage growth and inflation data. Current elevated yields in the bond market, particularly in the short- to medium-maturity space, may offer lucrative positioning opportunities in the lead-up to potential market recalibrations.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
From the original
UBS call that markets are overpricing Fed tightening. UBS see current elevated yields as a buying opportunity in short- to medium-maturity quality bonds rather than a level to fade. The disconnect between resilient headline jobs data and decelerating wage growth is central to UBS
Related speeches
4 itemsUBS's rate cut thesis meets a tougher test after Tuesday's yield surge
The desk is increasingly skeptical of UBS's rate cut thesis as recent market movements suggest a renewed upward pressure on yields, contradicting the bank's expectations of a disinflationary environment. Per the full note, UBS's position relies heavily on a widening yield gap, with long yields reflecting ongoing fiscal risks while short yields are expected to decline. However, in the wake of a strong sell-off in global bonds, including a rise in 10-year Treasury yields to nearly 4.78%—the highest since January 2025—it seems that the market is leaning toward further rate hikes rather than cuts. This dynamic complicates UBS's argument as geopolitical tensions and rising oil prices, with Brent above $92, contribute to sustained inflationary pressure that yields have yet to fully account for.
UBS sees market pricing of two Fed hikes as too aggressive ... get gold!
UBS's assertion that the market pricing of two Federal Reserve rate hikes by April 2024 is overly aggressive aligns with a growing narrative that suggests disinflationary pressures are set to reemerge, heavily influencing both rates and gold. Per the full note [source], UBS anticipates that tariff disinflation will reduce inflation trends, thereby dampening the Fed's hawkish stance and resulting in lower short to medium-term yields. This backdrop positions gold favorably, especially as UBS indicates a lack of urgency for Fed rate hikes, forecasting an extended hold before potential cuts in 2027. As institutional positions adjust to this narrative, the reaction in the FX markets will be crucial, particularly against pairs sensitive to U.S. interest rate expectations.
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