The end of inflation (again, and again)
Per the full note from UBS, persistent inflation has dampened consumer spending power, with inflation shocks appearing repeatedly over the past five years. These shocks, driven by specific global events such as the pandemic's supply chain disruptions and geopolitical tensions, have not created a structural inflation environment akin to previous decades. Instead, the lack of persistent inflationary pressures suggests that if these shocks cease, the economic landscape could stabilize. As inflation uncertainties linger, institutional traders must keep an eye on the evolving effects of these shocks on currency pairs, particularly in the context of their trading strategies.
What the desk is arguing
The desk argues that the current inflationary pressures are cyclical and not indicative of a lasting trend. Per the full note , the series of recent shocks—such as supply chain disruptions from the pandemic and geopolitical tensions—have led to temporary price increases rather than sustained inflation.
Supporting this view, Donovan highlights that each inflation episode is context-specific; for example, oil prices fluctuated notably due to the Russia-Ukraine conflict, and household appliance prices have similarly reacted to various shocks without leading to long-term inflationary trends. This indicates a lack of structural inflationary issues in developed economies.
Where it sits in our coverage
Current consensus targets for key currency pairs show firms anticipating tight trading ranges, with projected targets as follows: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
This perspective aligns more closely with JPMorgan, whose target reflects a higher expectation than BofA, which is more conservative. The desk's forecast supports the idea that if inflationary pressures stabilize, currency valuations could reflect this through modest appreciation against the dollar.
How other firms see it
Firms like JPMorgan and Goldman Sachs are aligned in their view that inflation will moderate in the coming months. Conversely, BofA and others are more skeptical, anticipating continued inflationary pressure, which may affect their valuations differently.
An important point of intersection with this thesis involves inflation indicators from the Fed, which could signal changing monetary policy trajectories and also influence the USD/EUR dynamics moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent inflation shocks are temporary and driven by specific events.
- 02Economic conditions currently do not support structural inflation.
- 03Consumer outlook may improve if these shocks diminish.
- 04Market strategies should account for potential stabilization in currency valuations.
Market implications
Traders should monitor the USD/EUR rate closely, particularly if inflation data indicates a stabilization of prices. Upcoming announcements from the Federal Reserve may also guide market expectations and positioning ahead.
Risks to this view
A significant catalyst that could reverse this outlook would be if geopolitical tensions escalate further, resulting in renewed inflationary shocks. Additionally, unexpected changes in monetary policy by central banks could alter positioning drastically.
Consumer spending power is hurt by persistent inflation. Each inflation shock is temporary, but sadly, the shocks keep coming. View this email in a web browser The end of inflation (again, and again) UBS Weekly Blog by Paul Donovan Developed economies’ inflation is repeatedly ending.
There have been a series of one-off inflation shocks over five years: pandemic supply chain problems, Russia’s invasion of Ukraine, US tariffs, the Gulf war. Each raised specific prices. Then, that inflation stopped or reversed—to be replaced by the next shock.
Oil prices rose with Russia’s invasion of Ukraine, then fell during the US tariff period, then rose with the Gulf war. Household appliance prices rose with the post-pandemic supply problems, then fell despite the Russia-Ukraine war, before rising (in the US, but not Europe) with tariffs. For both goods and services, the prices that cause inflation in one year do not drive inflation the next year.
This differs from past significant inflation episodes when imbalances in the economy drove general price increases across a wide range of products. Inflation drivers would linger for years at a time. Consumers feel they are in a continuous inflation cycle—every year, another price increase chips away at consumers’ spending power.
But economic conditions today do not allow specific inflation increases to last. Despite five years of repeated headline inflation shocks, economies lack the structural inflation-producing problems that would recreate past persistent inflation episodes. The world just needs the shocks to stop.
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