UBS On-Air: Paul Donovan Daily Audio 'Sliding into confusion'
The desk interprets recent US geopolitical communications as a source of instability for financial markets, particularly in the FX sphere. Per the full note from UBS's Paul Donovan, instances of mixed messaging from the US Administration regarding military posture in the Strait of Hormuz have increased market volatility, impacting investor sentiment. Current concerns about potential oil supply disruptions could have longer-term inflationary effects, with the release of US consumer price inflation data serving as a critical indicator of the Fed's next moves. Therefore, positioning and reactions in the USD may be particularly sensitive as these narratives unfold.
What the desk is arguing
The current communication strategies from the US government are causing uncertainty that translates into financial market volatility, particularly affecting risk sentiment in FX trading. As mentioned by Donovan, recent claims by Defense Secretary Hesgeth regarding military escorts in the Strait of Hormuz resulted in market reactions, evidencing the sensitivity of oil prices to geopolitical instability. The desk frames this as a crucial moment for investors to monitor how these tensions could impact broader inflation expectations.
Markets are acutely aware of the risks associated with disrupted oil supplies, especially after the Wall Street Journal reported that the International Energy Agency is contemplating a historic release of strategic oil reserves. While this could stabilize prices in the short term, as Donovan notes, such measures are not sustainable and may indicate deeper issues surrounding global energy dependence and security.
Investors should remain vigilant, as the trajectory of both geopolitical developments and US inflation data—impervious to immediate market shocks—will play significant roles in shaping policy expectations and market dynamics moving forward.
Where it sits in our coverage
Consensus outlook on the USD currently sits around a target of 1.075 against the EUR, with a range between 1.04 and 1.12. Some specific targets from other institutions include: - jpmorgan: 1.10 due March 2026 - bofa: 1.04 due March 2026
This view is somewhat at the middle of the current spread but leans slightly toward a bearish sentiment on the USD due to rising geopolitical tensions and inflation concerns, contrasting with firms like bofa, which is positioning for a more cautious approach.
How other firms see it
Firms like jpmorgan and others are aligning with a broader consensus that suggests caution on the dollar's strength amid global uncertainties. Conversely, bofa leans towards a bearish outlook on the greenback, indicating divergence within the market.
For traders, developments in the oil markets and Baker Hughes rig count data will be crucial indicators to watch, as these factors are likely to exert influence on USD valuations moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US geopolitical communications are creating instability, affecting FX risk sentiment.
- 02The potential for oil supply disruptions is raising inflation concerns, impacting market outlook.
- 03The upcoming US CPI data will be critical for assessing Fed policy direction.
- 04Market volatility is expected to persist amid uncertain communications from US leadership.
Market implications
Traders should keep an eye on the evolving situation in the Strait of Hormuz and associated oil prices as well as upcoming US CPI data, as these factors may trigger significant movement in the USD.
Risks to this view
A rapid de-escalation of tensions in the Middle East or a stronger-than-expected CPI report could force traders to reevaluate their positioning and lead to a reversal of the current bearish sentiment towards the USD.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 11th of March. It is not entirely clear what the US administration's current communication strategy is, but the consequence has been to create volatility in financial markets.
Investors do not necessarily like volatility, unless they are short-term speculators who are able to profit from special insights, of course. The social media post from current US Defence Secretary Hesketh that a tanker had been escorted by the US Navy through the Strait of Hormuz was taken down and subsequently denied, but not before the oil market had reacted. US President Trump posted a warning to Iran not to mine the Strait of Hormuz, but the nature of the warning could be interpreted as revealing the limited options the US has to respond.
The US has claimed it has destroyed some mine-laying vessels. If the Strait is mined, it raises the risk that oil prices will stay higher for longer. The Wall Street Journal reports that the International Energy Agency has proposed the largest ever release of strategic oil reserves, which has allowed crude oil prices to fall back.
But this is obviously a counter-measure that can only be used a limited number of times. Investors are likely to continue to focus on two issues. One, when the US withdraws, and two, how long Iran continues its attacks on shipping and neighbouring oil infrastructure after the US withdraws.
The release of US February consumer price inflation is, of course, immune from the effects of the war, but it still matters a great deal for financial markets. The Federal Reserve should not respond to oil price shocks. There are still enough economists at the Fed to know that this is a one-off relative price move over which they have no control.
Fed Chair Powell can hardly order the FOMC to begin mine-sweeping operations in the Gulf. Financial banks are supposed to react to inflation shocks, not relative price shocks. A broad-based increase in prices suggests an imbalance in the economy which monetary policy can tackle.
A relative price shock suggests an imbalance in a single market, which monetary policy can do relatively little about. So whether there are underlying inflation pressures evident in the February data matters quite a lot. The expectation is that underlying inflation is likely to be subdued still, giving the Fed room to ease later this year.
However, the affordability crisis in the States is not about the inflation reality, but focuses on the price of high-frequency purchases and inflation perceptions. Getting into the detail of the inflation report is therefore important in trying to gauge the political pressures, relevant because this may sway the US administration's war policy. Already, gasoline prices are approaching a 27% increase from the lows of January, not something that will be reflected in the data today, but certainly something that will be being noticed by consumers.
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