UBS sees market pricing of two Fed hikes as too aggressive ... get gold!
At a Glance
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 , 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.
Key Takeaways
- 01UBS deems market expectations of Fed hikes as overly aggressive, advocating for a dovish outlook.
- 02Anticipated tariff disinflation could lower inflation trends by 0.8 percentage points, affecting rate projections.
- 03The Fed's focus may shift towards employment protection rather than inflation control, altering monetary policy approaches.
- 04Gold is positioned favorably in this context, diverging from Deutsche Bank's near-term bearish outlook.
Full Analysis
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.
Market Implications
Traders should watch for USD/Gold fluctuations as positioning around Fed expectations adjusts; a key level to monitor is near the 1.075 consensus target. Any developments suggesting a fast tracking of Fed hikes could derail this outlook.
From the original
UBS's pushback on Fed hike pricing is directly relevant to rates, duration and gold. If the bank's thesis is correct that tariff disinflation is beginning to reassert itself and that softer second-half growth will dampen any hawkish impulse, then current yields on short to medium
Related speeches
4 itemsUBS sees Fed on hold as Warsh downplays inflation risk despite hike bets
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 [source], 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.
Fed's unanimous hike stirs debate over how long high inflation persists
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