UBS On-Air: Paul Donovan Daily Audio 'A gilded age'
The desk views the surge in gold prices as a clear indication of central bank strategies transitioning towards gold accumulation, offering a hedge against U.S. dollar volatility. Recently hitting a record $3,500 per ounce, as stated by UBS Chief Economist Paul Donovan, this rally is partially fueled by expectations of a Federal Reserve rate cut, which diminishes the opportunity cost of holding gold. This sentiment suggests that institutional players might consider revising their currency positions, particularly in pairs sensitive to gold's valuation like the EUR/USD and GBP/USD. With no immediate calendar events highlighted, focus shifts to U.S. policy statements which could further influence market sentiment surrounding the dollar source.
What the desk is arguing
The desk argues that the recent surge in gold prices signals a larger shift in monetary policy and central bank asset allocation strategies. Per the full note from UBS, this shift underscores a preference for assets that provide independence from potential U.S. Treasury manipulation.
Supporting this view, Donovan cites the substantial rise in gold prices and the influence of the Federal Reserve's impending policy decisions, particularly the potential for interest rate cuts. With 10-year U.S. Treasury yields experiencing slight upticks, this also reflects changing market dynamics and the interplay of gold with U.S. dollar assets.
Where it sits in our coverage
For the EUR/USD, the median consensus target sits at 1.1700 with a range of 1.1200–1.2000; UBS specifically targets 1.2000 for March 2026. This suggests that as gold continues to rally, the euro might see supportive pressure against the dollar.
Currently, ubs projects a high target compared to other firms like deutschebank at 1.1800 and citi at 1.1300, placing UBS's view at the upper bound of the spectrum.
How other firms see it
Aligned firms like hsbc and deutschebank share a bullish outlook on the EUR/USD, with both targeting 1.1800 or higher by the end of 2026. Conversely, citi appears more conservative, projecting lower EUR/USD levels.
This analysis of the gold market underpins thoughts on the GBP/USD trajectory as well, linking closely to the broader implications of monetary policy adjustments by the Federal Reserve as well as the Bank of England.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Gold prices reaching $3,500 signal a shift in central bank asset management strategies.
- 02Expectations of rate cuts by the Federal Reserve lower opportunity costs for holding gold.
- 03UBS maintains a bullish target for EUR/USD at 1.2000 by March 2026, well above the cross-firm average.
- 04Policy statements and market dynamics may influence dollar strength and related currency pairs.
Market implications
Watch for any formal statements from the U.S. government regarding fiscal policy or trading relations, as these could affect both dollar valuation and gold prices. The EUR/USD remains a key focus; any surprises in gold pricing should see direct correlations in its movement.
Risks to this view
A sudden change in U.S. monetary policy, such as an unexpected rate hike by the Federal Reserve, would negatively impact gold prices and could lead to a stronger dollar, reversing the projected bullish sentiment towards EUR/USD and GBP/USD.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
UOB | Bullish | 1.1565 |
Good morning, this is Paul Donovan, Chief Economist at GVS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 2nd of September. The global gold price hit a new record overnight, breaking through $3,500 per ounce.
Central bank buying was an early foundation for the rise in the price of gold, though it should be noted that central banks switching to gold holdings mean that they still hold a dollar asset as a reserve, just not a dollar asset that might be subject to the control of the U.S. Treasury. There's also the ongoing expectation that the U.S.
Federal Reserve will cut rates, which lowers the opportunity cost of holding gold as a non-interest-bearing asset. Two-year U.S. government bond yields have maintained a low yield recently, although the 10-year area of the yield curve has seen yields rise somewhat in recent days. U.S.
President Trump is to give an Oval Office statement later today. There are any number of topics that might be the subject of this announcement, ranging from trade policy with India, to the war in Ukraine, to deployment of the National Guard in the United States. There are also any number of possible policy directions the President might choose to take in each of these areas.
Policy uncertainty, of course, has a bearing on corporate investment and hiring decisions, the latter of which is in focus as a crucial driver of Fed policy in the short term. Outside of the U.S., South Korea had a disinflation episode that was not a proper disinflation episode. Headline and core inflation rates moved quite sharply slower in August, but this related to a single item – a one-off price discount from a telephone company.
Inflation, disinflation and deflation should really be about a general change in price levels because that signals changing economic circumstances and potential imbalances in the economy. A single price level might say something about an individual company or sector of the economy without signalling anything about the broader state of balance. Ahead we have euro-area aggregate inflation for August, which is expected to show essentially stable, low inflation across a broad range of goods and services.
U.S. data releases include construction spending figures and assorted business sentiment opinion polls. The sentiment data can be headline-grabbing, employment and prices being particular focal points for investors, but that does require the observer to actually believe the numbers mean what they say they mean. That's all for today.
Have a good day. UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC.
Sources & References
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