UBS strategists have signaled that foreign exchange markets may experience heightened turbulence in the coming weeks amid concerns that the Iran conflict could impose a prolonged strain on global energy supplies. The firm points to recent moves in crude markets and altered central bank dynamics as factors likely to amplify currency fluctuations.
Brent crude has approached the $115 per barrel mark, while UBS notes that buyers in Asia are facing prices nearer to $150 per barrel. The bank cautions that the longer the conflict endures, the greater the chance that energy infrastructure could become a target, which in turn would exert further upward pressure on oil. UBS said such a scenario could push prices beyond the spikes observed in 2022.
In its published note, UBS set out a range of possible outcomes tied to sustained higher energy costs. A doubling of energy prices, the bank said, would exert a pronounced effect on markets if it were maintained. At an extreme level, the note warned that if prices reached $200 per barrel, a global mobility crisis could follow.
Against that backdrop, UBS expects currency volatility to climb by about 4 percentage points in the near term, bringing volatility to levels last recorded during the COVID-19 pandemic in 2020 and the Ukraine conflict in 2022. The bank has therefore adopted a selective stance toward selling volatility, concentrating on currency pairs it judges to be trading at structurally attractive levels. UBS specifically cited NZD/USD and EUR/NZD as current preferences for those trades.
Major central banks - including the Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan - paused on interest-rate moves this week while underlining that growth and inflation outlooks are more uncertain than before. UBS interprets these moves as central banks temporarily looking past the recent oil surge, but it warned that the prevailing narrative would likely shift if energy prices prove persistent.
On Japan, UBS noted that the Bank of Japan kept rates on hold but adopted a more hawkish tone that left open the possibility of further tightening. Still, UBS said market confidence in the BoJ's readiness to carry out additional hikes remains weak.
In Switzerland, the SNB's decision to stand pat, combined with upside inflation risks, points to lower real interest rates, UBS argued. The bank also highlighted the SNB's increased willingness to act against excessive appreciation of the franc, and said it does not favor chasing CHF strength at this time.
The Federal Reserve, UBS said, has left all options on the table while acknowledging risks stemming from the Iran conflict. The bank continues to see room for at least a 25-basis-point rate cut this year.
UBS expects that a mix of resilient macro data and the possibility of fewer rate reductions overall will broadly support the U.S. dollar. The firm suggested the DXY could trade around the 102 level in the coming weeks.
As a result of intensifying geopolitical uncertainty and the prospect of sustained higher oil prices, UBS has revised several short-term currency forecasts. It now anticipates EUR/USD around 1.15 by the end of June, lowered from an earlier 1.20 projection. The bank cut its June EUR/CHF outlook to 0.91 from 0.93.
Regarding the British pound, UBS sees reduced scope for near-term rate cuts, particularly if economic indicators continue to stabilize, which affects the GBP/USD outlook. In Asia, the firm raised its USD/JPY targets to 155 for June and 152 for September, citing the ongoing pressure higher oil prices place on yen sentiment.
UBS also noted moves outside Europe and Asia. The Reserve Bank of Australia increased its cash rate by 25 basis points to 4.1 percent on Thursday, a decision in line with consensus. UBS drew attention to the narrow 5-4 voting split, which the bank said reveals internal disagreement about the timing of further policy tightening.
In South Africa, headline inflation eased to 3 percent in February from 3.5 percent in January. UBS observed that headline inflation is likely to reaccelerate in the months ahead as a result of recent increases in energy costs.
Implications for markets and investors
- Energy prices and supply security are central to near-term FX volatility and could feed through to broader market risk premia.
- Central-bank reactions and the timing of potential policy moves will remain a key influence on currency performance.
- Pairs highlighted by UBS for tactical positioning include NZD/USD and EUR/NZD, while the bank has adjusted forecasts on major crosses such as EUR/USD, EUR/CHF and USD/JPY.