UBS Morning audio comment: Up we go again
The rise in oil prices above USD 110 per barrel signals potential market volatility, particularly regarding U.S. monetary policy and energy-related inflation concerns. As highlighted by UBS Chief Economist Paul Donovan, this recent price movement is not just a minor fluctuation; it may lead to significant political and economic implications, especially as U.S. diesel prices remain elevated. Per the full note , there is apprehension about whether this may prompt concessions from the U.S. to Iran amid fears of inflationary pressures on consumers, though underlying inflation dynamics appear muted. Traders should remain alert to these developments, especially as they could inform future Federal Reserve actions.
What the desk is arguing
The desk considers the surge in oil prices a key factor that could shape near-term market dynamics and U.S. economic policy. This price point holds psychological significance for both investors and policymakers, as a clear signal of inflationary pressures emerges. Per the full note , the ongoing price increases, influenced by recurring geopolitical tensions, suggest that inflation concerns may resurface, leaning on central banks to adjust their stances accordingly.
Adding to the complexity, as noted, these oil price movements come after a series of major supply shocks that have altered market perceptions. For instance, the first three shocks—including the pandemic and geopolitical unrest—have created a backdrop of perceived inflation even if immediate inflationary effects are limited. The desk views this as a critical time to monitor how central banks might respond, especially as recent data indicated modest inflation trends in the UK.
Where it sits in our coverage
Our consensus target for relevant FX pairs currently sits at 1.075, with a range spanning from 1.04 to 1.12. Key firms include: - jpmorgan: Target 1.10 (Mar26) - bofa: Target 1.04 (Mar26)
This view aligns more closely with jpmorgan's upper target forecast, suggesting a bullish stance on the effects of rising oil prices on currency valuation dynamics.
How other firms see it
Firms such as jpmorgan and others are anticipating similar price movements, indicating a consensus on the impact of oil prices on inflation and currency markets, while bofa appears more cautious about potential downside risks.
The downward pressure on the dollar may become more prominent should crude oil prices sustain higher levels, particularly in light of potential U.S.-Iran negotiations that could reshape energy market dynamics. Watch for USD/JPY as a key indicator of market sentiment related to this oil price trajectory.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Oil prices hit USD 110, presenting significant political and economic implications.
- 02U.S. diesel prices remain elevated, increasing inflationary concerns.
- 03Central banks may adjust their strategies in response to rising energy costs.
- 04Historical context of supply shocks influences current market perceptions.
Market implications
Traders should closely monitor the USD 110 level in crude oil, as persistent prices could trigger a response from the Federal Reserve, influencing currency pairs significantly. Concessions with Iran may also reshape market sentiment, particularly in USD/JPY.
Risks to this view
A reversal in the thesis could occur if U.S. inflation data significantly declines or if geopolitical tensions ease, reducing the urgency for central bank intervention. Additionally, disappointing economic data could counteract concerns over oil price inflation.
Oil prices moved above USD110 per barrel. Markets’ and politicians’ focus on round numbers gives the move significance. View this email in a web browser Up we go again UBS morning audio comment by Paul Donovan Oil prices rose above USD110 per barrel.
Markets and politicians focus on round numbers, so while a small price increase is not directly important, the move does have potential consequences. The US administration is very sensitive to higher oil prices, and US retail diesel prices remain near their all-time highs. Investors’ concerns will likely focus on whether this will produce US concessions to Iran, or more aggressive central bank action.
Oil prices are a one-off shock, beyond central banks’ control. Unfortunately, they are the fourth successive one-off shock: pandemic supply chain issues, the Russian invasion of Ukraine, tariffs, and the Gulf war. Four successive temporary shocks give an illusion of permanence.
However, the absence of second-round effects, beyond some profit-led inflation in 2021/22, might suggest that underlying economic structures are not inflation prone. The UK offers its range of price data for September. Despite being the fastest growing G7 economy so far this year, UK consumers are not facing much inflation at a retail level.
The weirdness of the UK electricity pricing model will add to inflation. Oil prices drove Japan’s September import costs higher. Exports rose, with chips playing a role, but the growth was weaker than every economic forecast.
That is extremely unusual, and comes despite yen weakness. Read important disclaimer 〉 Listen to today's Wednesday, 21 October update Listen now 〉 Recommended content Listen to past recordings in Paul Donovan's daily updates 〉 Nobel Perspectives - Exploring the questions that shape our world 〉 You have received this email because you registered at . Unsubscribe #end --> | Edit profile Publication data: UBS AG, P.O.
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