UBS On-Air: Paul Donovan Daily Audio 'Optimistic bias versus bad news'
Lead — The desk believes that the geopolitical tensions surrounding the US-Iran relationship have created a volatile environment that could influence oil prices and equities in the short term. Per the full note from UBS, the recent collapse of talks has already been pushing oil prices above $100, with potential implications for inflation and consumer sentiment in the US. This backdrop presents a dual-edged opportunity for FX traders as they interpret market reactions and sentiment shifts. Given the optimistic bias that still pervades equity markets despite the turbulence, the desk anticipates a cautious approach from traders in navigating these waters.
What the desk is arguing
The desk frames this as a precarious balance where rising oil prices due to geopolitical tensions may not yet trigger the substantial demand reduction required in the markets. UBS, as cited in the source note, points out that while oil prices have surged following the US's blockade announcement, they remain below the levels that would drastically impact demand and supply dynamics.
The data reveals that the US consumer price inflation is already feeling the effects of the rising oil prices, potentially creating a feedback loop that might bring the US and Iran closer together in future negotiations. Should inflation pressures continue to climb, it may lead to more significant policy shifts domestically, further influencing market weights.
Where it sits in our coverage
Our consensus target for EUR/USD is set at 1.075, with a range from 1.04 to 1.12. Notable firms in our analysis include: - jpmorgan: target at 1.10 for Mar-26 - bofa: target at 1.04 for Mar-26
This position at the center of the range reflects the desk's view of an upcoming volatility driven by external factors while still citing overall market resilience.
How other firms see it
Several firms, including jpmorgan, are aligned with this optimistic yet cautious stance towards the evolving geopolitical situation and its impact on market dynamics. In contrast, bofa presents a more bearish view, expecting tighter price dynamics against the EUR/USD.
Traders should keep a close eye on oil prices, as significant moves in crude could directly influence broader market sentiment and currency trajectories, particularly in pairs such as USD/CAD and AUD/USD that are affected by commodity-driven flows.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical tensions with Iran are pushing oil prices higher and introducing volatility into equity markets.
- 02Inflation concerns may be rising in the US, driven by the price of oil, which could impact economic negotiations.
- 03Traders should be mindful of optimistic sentiment lingering in markets, despite recent negative developments.
- 04Monitoring of the USD's performance relative to commodity currencies is crucial as the situation evolves.
Market implications
Watch for the next key resistance level at 1.10 for EUR/USD as geopolitical trends shift. Any significant oil price shock could create turbulence around this threshold. Additionally, closely monitor inflation data releases as these may shape market reactions.
Risks to this view
The call could be invalidated if a rapid de-escalation occurs in US-Iran tensions, reversing the current oil price trajectory and leading to a significant sell-off in equities. Any resurgence in negotiations could also undermine the bearish sentiment in commodity prices.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management at 7 o'clock in the morning London time on Monday the 13th of April. The collapse of talks between Iran and the United States over the weekend has inevitably pushed oil prices higher and equity markets lower. There is now perhaps some clarity about the US aims for the war, which are seemingly broadly in line with reverting to the 2015 treaty with Iran.
US President Trump declared that the US Navy would immediately blockade the Strait of Hormuz and intercept any ships that had paid the Iranian tariff for passage. The US military later clarified that immediately meant 2pm GMT today and blockade meant ships using Iranian ports. That does give a small window for the policy to be reversed.
The threat of a blockade jeopardises Iranian exports of oil, especially to China, and the prospect of a further reduction in global oil supply help to push oil back over $100 a barrel. However, markets are still retaining an optimistic bias. The price of oil is nowhere near the level required to reduce demand by 15% or so, which is what would be required if Hormuz completely closed.
Equities in Asian trading are down, but they have not reversed all of the optimism that came with the announcement of a ceasefire. The effects of higher oil prices were already visible in the March US consumer price inflation data and of course inflation perceptions will be more affected. That may be helping the relative optimism of financial markets, as this does create domestic pressures within the US that might bring the US closer to Iran's position in future negotiations.
In Hungary, despite the backing of Russian President Putin and Trump, Prime Minister Orbán was defeated in the weekend's elections, with the opposition projected to win a super majority in Parliament. That will facilitate constitutional change. This signals a shift in Hungary's behaviour within the European Union, for example, on locking loans for Ukraine.
While it is dangerous to extrapolate too far from one country into others, there may be implications in the politics of other European countries as well. According to polls, the opposition's support rose, enabling the super majority, after the public intervention of US Vice President Vance and Trump, in support of the government. Politicians elsewhere may therefore reconsider how publicly they choose to align with the US administration.
The data calendar is very quiet. There are home sales figures from the United States for March. The housing market is something of a political focus as it ties in with the US affordability crisis.
Higher mortgage rates and higher home construction costs, arising from a shortage of labour for housing construction, are keeping home ownership beyond the reach of a larger section of the US population. The average age for buying one's first home is still increasing. Delayed home ownership can have emotional significance – culturally, home ownership matters as a status symbol for many people – and it also has an economic relevance.
It not only affects things like demand for consumer durable goods, it can help innovation and entrepreneurship, as the home is often tapped for capital when people start a business. There are a few central bank speakers today as well – the ECB, Bank of England and US Federal Reserve. However, central banks have neither special insight into, nor the ability to influence, the outcome of the war.
It's too soon for second-round effects to really be showing in inflation data or labour market information, and these are the areas where central banks do have the ability to exert some influence. So there's not much insight to be expected today. 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. It's subsidiaries, or affiliates, collectively referred to as UBS.
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