UBS sees market pricing of two Fed hikes as too aggressive ... get gold!

What the desk is arguing

UBS argues for a re-evaluation of the expectation surrounding Federal Reserve rate hikes, claiming that the consensus anticipating two hikes by April 2024 is excessively optimistic. The bank posits that a return of tariff disinflation and anticipated softer growth in the latter half of 2026 will fundamentally alter the Fed's approach towards maintenance of rates, harboring a more dovish tilt.

The rationale is underscored by UBS's forecasts suggesting a potential 0.8 percentage point reduction in inflation trends due to easing price pressures from core goods, highlighting how current yield levels may be mispriced and poised for correction. The shift in focus towards employment protection versus inflation control, especially in light of the AI-induced labor market transformations, further signifies a substantial change in the Fed's reaction function.

Where it sits in our coverage

Our consensus target for USD/Gold sits at 1.075, with a range of 1.04 to 1.12. Major firms contributing to this range include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

The desk's view posits a more bearish outlook than the upper bound of this spread, as firms like jpmorgan support the notion of constrained rate hikes while bofa presents a more cautious stance.

How other firms see it

Many aligned firms echo UBS's broader narrative—believing near-term Fed tightness is less likely. Contrarily, firms like bofa suggest a more immediate tightening cycle is still in play.

For traders, it's essential to monitor the interplay between gold prices and the anticipated Fed actions, particularly how these might affect USD/JPY movements and overall risk sentiment in broader currency pairs.