UBS sees market pricing of two Fed hikes as too aggressive ... get gold!
UBS's assertion that the market pricing of two Federal Reserve rate hikes by April 2024 is overly aggressive aligns with a growing narrative that suggests disinflationary pressures are set to reemerge, heavily influencing both rates and gold. Per the full note source, UBS anticipates that tariff disinflation will reduce inflation trends, thereby dampening the Fed's hawkish stance and resulting in lower short to medium-term yields. This backdrop positions gold favorably, especially as UBS indicates a lack of urgency for Fed rate hikes, forecasting an extended hold before potential cuts in 2027. As institutional positions adjust to this narrative, the reaction in the FX markets will be crucial, particularly against pairs sensitive to U.S. interest rate expectations.
What the desk is arguing
UBS argues for a re-evaluation of the expectation surrounding Federal Reserve rate hikes, claiming that the consensus anticipating two hikes by April 2024 is excessively optimistic. The bank posits that a return of tariff disinflation and anticipated softer growth in the latter half of 2026 will fundamentally alter the Fed's approach towards maintenance of rates, harboring a more dovish tilt.
The rationale is underscored by UBS's forecasts suggesting a potential 0.8 percentage point reduction in inflation trends due to easing price pressures from core goods, highlighting how current yield levels may be mispriced and poised for correction. The shift in focus towards employment protection versus inflation control, especially in light of the AI-induced labor market transformations, further signifies a substantial change in the Fed's reaction function.
Where it sits in our coverage
Our consensus target for USD/Gold sits at 1.075, with a range of 1.04 to 1.12. Major firms contributing to this range include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view posits a more bearish outlook than the upper bound of this spread, as firms like jpmorgan support the notion of constrained rate hikes while bofa presents a more cautious stance.
How other firms see it
Many aligned firms echo UBS's broader narrative—believing near-term Fed tightness is less likely. Contrarily, firms like bofa suggest a more immediate tightening cycle is still in play.
For traders, it's essential to monitor the interplay between gold prices and the anticipated Fed actions, particularly how these might affect USD/JPY movements and overall risk sentiment in broader currency pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UBS deems market expectations of Fed hikes as overly aggressive, advocating for a dovish outlook.
- 02Anticipated tariff disinflation could lower inflation trends by 0.8 percentage points, affecting rate projections.
- 03The Fed's focus may shift towards employment protection rather than inflation control, altering monetary policy approaches.
- 04Gold is positioned favorably in this context, diverging from Deutsche Bank's near-term bearish outlook.
Market implications
Traders should watch for USD/Gold fluctuations as positioning around Fed expectations adjusts; a key level to monitor is near the 1.075 consensus target. Any developments suggesting a fast tracking of Fed hikes could derail this outlook.
Risks to this view
A shift toward a more hawkish Fed stance driven by unexpected inflation data or robust employment numbers would invalidate this call, forcing a reassessment of both interest rate trajectories and gold pricing.
UBS's pushback on Fed hike pricing is directly relevant to rates, duration and gold. If the bank's thesis is correct that tariff disinflation is beginning to reassert itself and that softer second-half growth will dampen any hawkish impulse, then current yields on short to medium maturity bonds represent an overshoot that will ultimately correct lower, making the entry point attractive. The five Warsh task forces introduce a structural delay argument that is distinct from the usual data-dependency framing: if the Fed is reviewing its own frameworks simultaneously, the bar for action in either direction rises.
For gold, UBS's medium to long-term constructive view provides a counterweight to Deutsche Bank's more bearish near-term outlook, with the divergence hinging largely on the timing and direction of the eventual Fed pivot. The AI labour displacement risk flagged by UBS, if it materialises at scale, would shift the Fed's reaction function back toward employment protection and away from inflation fighting, a scenario that would accelerate the path to cuts. --- UBS says market pricing of two Fed hikes by April is too aggressive, forecasting an extended hold before cuts in 2027 as tariff disinflation returns and growth softens. Summary: UBS believes the probability of near-term Federal Reserve rate hikes is low, forecasting an extended period on hold before a pivot toward lower rates in 2027, despite markets pricing two hikes by April, according to the bank's note The bank cited emerging core goods disinflation in May CPI data, with tariff pass-through beginning to unwind in price-sensitive categories, and estimated this could reduce inflation trends by around 0.8 percentage points over the next year UBS expects softer US growth conditions to re-emerge in the second half of 2026, driven by diminishing fiscal support and weak real income growth weighing on household consumption, raising the hurdle for additional tightening Fed Chair Warsh's announcement of five task forces covering communications, the balance sheet, data, productivity and labour markets, and inflation frameworks is seen by UBS as likely to delay major policy adjustments and slow implementation, particularly if consensus among policymakers proves elusive UBS said a sustained rise in inflation expectations, growth reaccelerating above 2.5% or a steady decline in the unemployment rate would be needed to materially raise the probability of hikes, and none of those conditions has currently been met The bank recommended adding to short to medium maturity quality bonds at current elevated yields and maintained a constructive medium to long-term outlook on gold, underpinned by its view that the Fed policy rate will ultimately move lower UBS has pushed back against what it describes as overly aggressive market conviction around Federal Reserve rate hikes, arguing that investors have over-interpreted Chair Kevin Warsh's hawkish signals from last week's FOMC meeting and that the most likely policy path remains an extended hold followed by a move toward lower rates in 2027.
Sources & References
How we cover this story