UBS On-Air: Paul Donovan Daily Audio 'Affordability, again'
Lead — 4-6 sentences. The desk sees rising diesel prices as a bellwether for broader affordability issues in the U.S., emphasizing that average diesel prices have surpassed USD 6.50 per gallon, which heightens inflationary concerns. Per the full note from UBS, overall consumer prices have risen by 4.8% since January 2025, while motor fuel costs surged by 17.0%. This situation may have broader implications on consumer spending and, by extension, currency valuations. With no forthcoming economic calendar events of significance, market players should be vigilant about how rising fuel costs may influence central bank projections and trader sentiment in the near term.
What the desk is arguing
The desk interprets the recent spike in diesel prices as indicative of a wider affordability crisis in the U.S. economy. Per the full note from UBS, the hike to over USD 6.50 per gallon has intensified inflationary pressures, especially as consumer price inflation has risen 4.8% overall since January 2025. The noticeable increase in motor fuel prices by 17% will likely squeeze disposable incomes further, potentially affecting consumer expenditures and sentiment.
The evidence of increasing fuel costs comes at a time when the U.S. economy is battling inflationary pressures. Such rises in key commodity prices often lead to increased expectations of tightening monetary policy from the Federal Reserve, which could shift trader positioning in the FX markets. Traders should also be cautious as affordability perceptions can influence spending habits, pushing the Fed to reassess their economic outlook.
Where it sits in our coverage
Our consensus targets currently sit around 1.075, with the following relevant firm views: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns closely with jpmorgan's slightly bullish target for the currency pair, while bofa takes a more cautious stance, positioning us in the middle of their spread. This outlook suggests a cautious bias amid rising inflationary indicators, pressing the potential for a later Fed response.
How other firms see it
A group of firms, including jpmorgan, are aligned in recognizing the implications of rising fuel costs on future economic performance. Meanwhile, bofa represents a contrasting view, emphasizing caution over any immediate bullish positioning amid inflationary uncertainties.
Related currency pairs such as EUR/USD and USD/CAD may react to similar driver dynamics, affected by the Fed's outlook and inflation adjustments. Watch these closely for spillover effects based on U.S. pricing data as the economic landscape evolves.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Rising diesel prices signal broader affordability issues in the U.S.
- 02Consumer price index trends are increasingly inflationary, pressuring consumer spending.
- 03Expectations of Fed policy changes may shift as inflation indicators evolve.
Market implications
Eyes should be on the USD as higher inflation influences central bank communications. A critical observation for traders would be how far diesel prices push consumer spending forecasts, as these trends could precipitate a response from the Fed regarding interest rates.
Risks to this view
A significant reversal could emerge if fuel prices stabilize or decline unexpectedly, leading to diminished inflationary pressures. Additionally, political developments affecting U.S.-Iran relations could shift market sentiment, complicating the inflation narrative.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 21st of September. In the United States, the average prices of diesel broke above $6.50 per US gallon on Saturday, another all-time high.
Gasoline prices are just below $4.50 per US gallon, which is approaching but still below this year's highs reached back in May. Since January of 2025, the level of US consumer prices as measured by the Consumer Price Index is up 4.8% and the weighted average of motor fuel prices is up 17%. The sense of an affordability crisis, which combines inflation perception, perceptions of income growth and what people feel they should be able to afford, does not seem likely to be fading.
US President Trump has indicated a willingness to meet Iranian President Peshachian. The rhetoric from both sides has remained aggressive, however. For those looking towards the positive, the US agreement with Denmark over Greenland might offer a note of optimism.
This was essentially a restating of a long-established agreement. It's probably not wise to look for too many parallels towards reviving the Obama deal with Iran, given the level of mutual distrust that exists. But it does show that spinning an established international deal slightly differently can change the US President's attitude.
In Germany, there were some more local election results over the weekend, with the far left doing well in Berlin and the far right doing well in Mecklenburg-Western Pomerania. German Chancellor Merz has vowed to stay on as Chancellor. Merz was being backed by local leaders before the elections, but there is a sense that this support is in part because of the lack of an obvious alternative as Chancellor at this stage.
The patterns of German politics reflect global trends towards a more polarised political environment. As a broad trend, concerns about social status encourage support for the far right, and concerns about economic well-being encourage support for the far left. It's dangerous to extrapolate too much into other countries' politics.
For one thing, patterns of far right anti-immigration support tend to correlate with whether people know immigrants, and the more cosmopolitan a society, the less likely it is that far right rhetoric will succeed. But with a number of European elections ahead, this will remain a market focus. Late on Friday, the Bank of Japan was casually asking foreign exchange dealers what price they might be willing to sell yen in the foreign exchange market.
This rate check is a subtle way of signalling that maybe, possibly, the Bank of Japan might be thinking about intervening in the foreign exchange markets on behalf of the Ministry of Finance, but only if it had nothing better to do on a Friday night. It turns out the Bank of Japan did have something better to do, and did not actually intervene. But the subtle threat pulled the yen back from a post-policy meeting bout of weakness.
The pullback was not that significant, which is a reminder that there is only so far intervention can go in defiance of economic fundamentals. South Korea's early September export data showed continued strength. The narrative is not changing.
Chip exports were up a modest 259% year-over-year as the artificial intelligence obsession continues. So far, South Korea is one of the few economies to be reaping a genuine economic benefit from the AI boom in real time, which is something domestic policymakers will have to consider. One sector booming like this can have negative implications for other sectors of an economy via currency effects, labour markets and capital flows, even as the headline economic data receives a boost.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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