UBS On-Air: Paul Donovan Daily Audio 'Perceptions on the cost of war'
The desk contends that current US geopolitical uncertainty, particularly regarding the Gulf, is creating volatility in FX markets, especially in the USD pairs. Per the full note from UBS's Paul Donovan, conflicting statements from US officials about the Gulf conflict suggest that US economic stability, despite being touted as an oil exporter, is under threat due to potential emergencies that could require aggressive monetary policy responses. This ambiguity could further weaken the USD in the near term, influencing pairs such as EUR/USD and GBP/USD amidst rising oil prices and consumer apprehension, particularly as US consumers adjust their spending habits to cope with higher costs.
What the desk is arguing
The desk believes that the current discord within US government statements surrounding the Gulf conflict signals potential lingering risks for the USD. Donovan highlights how Treasury Secretary Bessent’s initial denial of mining activity in the Strait of Hormuz later shifted to a more ambiguous acknowledgment, reflecting uncertainty that could influence FX market behavior.
Additionally, the call for an emergency rate cut from President Trump brings into question the overall health of the US economy, despite claims of robust export capabilities. If uncertainty persists, the USD could face downward pressure against currencies like the EUR and GBP, which are currently positioned amid fluctuating geopolitical narratives.
Where it sits in our coverage
The consensus target for EUR/USD currently stands at 1.1700, with a range of 1.1200 to 1.2000. Notable targets from firms include deutschebank at 1.1800 and mufg at 1.1800 for March 2026.
In contrast, the desk's view suggests potential underperformance for the USD, which could imply that the consensus remain optimistic, landing at the upper end of the forecast range. The focus is on how geopolitical developments could drive a divergence in USD performance against these expectations.
How other firms see it
Aligned firms are predominantly optimistic on EUR/USD, with projections from mufg, deutschebank, and bofa signaling potential strength against the backdrop of US uncertainty. Conversely, firms like citi and nomura suggest weakness in USD against GBP, reflecting differing views on the Fed's likely trajectory and its global ramifications.
Additionally, USD/JPY dynamics will be crucial as market players assess the interplay between US rate decisions and Japanese monetary policy, particularly in light of recent economic indicators following the Gulf developments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Political uncertainty in the US regarding the Gulf could weigh on the dollar's strength.
- 02Conflicting statements from US officials highlight a lack of coherent strategy, potentially destabilizing USD.
- 03Higher oil prices may pressure US consumers, influencing spending and economic stability.
- 04Cross-market dynamics with EUR/USD and GBP/USD may evolve based on consumer sentiment and geopolitical risks.
Market implications
Traders should closely monitor the EUR/USD levels, particularly around 1.1700, as geopolitical developments emerge. The volatility in the oil market could spill over into consumer confidence metrics, making upcoming data prints crucial for positioning ahead of any rate discussions from the Fed.
Risks to this view
A significant improvement in US economic indicators could reverse bearish sentiment; any positive GDP revisions or labor market strength would bolster the USD against its counterparts. Additionally, a substantial de-escalation of tensions in the Gulf could also cushion the dollar's recent depreciation and restore investor confidence.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 13th of March. There is a certain amount of confusion in US administration statements about the war in the Gulf and its consequences.
Confusion perhaps tipping over into incoherence. US Treasury Secretary Besant said that Iran was not mining the Strait of Hormuz. This was later clarified by US administration officials to mean that Iran was in fact believed to be mining the Strait of Hormuz.
US President Trump stressed how well positioned the US economy was as an oil exporter, but then later called for an emergency inter-meeting rate cut from the US Federal Reserve. The sort of policy response that would take place only if the US economy were teetering on the very brink of recession and crisis. Uncertainty about the Gulf and US policy seems likely to continue.
Uncertainty about US policy probably exceeds that of uncertainty about Iranian policy at this stage. The Iranian government is fairly consistently pledging to keep the Strait of Hormuz closed and is talking of $200 oil. On the data front, we have US January personal income and personal spending data and the accompanying personal consumer expenditure deflator.
Personal spending is expected to hold fairly steady in real terms, something that the 1.5% point decline in the household savings rate last year has helped to facilitate. Consumers in the States are still saving, but they've been saving less in order to enable them to meet the costs of the tariffs. This is, to some extent, old news.
But the patterns of consumption and saving that met with the costs of higher tariffs can continue to meet the costs of higher gasoline prices, giving resilience to US consumer spending despite soaring gasoline prices. Retail gasoline prices are now up 29%, give or take, from the lows of the year. Trump is threatening to tariff US importers of goods from 60 countries, including the EU, China and the UK.
This is in addition to investigations to introduce tariffs on importers of goods from China and the EU that was announced earlier this week. These tariffs, if implemented, would take some time to take effect, but the impact on the affordability crisis, which relies on perceptions rather than reality, might be a bit more immediate. With regard to the US affordability crisis, there is the March Michigan Consumer Sentiment survey data due today, with its inflation expectations component.
This might attract headlines, but it's not necessarily terribly useful. Only some of the effect of the war on inflation perceptions is likely to be captured in this survey. The partisan bias is also quite extreme.
Sources & References
How we cover this story
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