Market optimism weakens the USD outlook, and UBS is not rushing to buy USD against the trend

Overview

This report is UBS Global FX Strategy's FX Compass macro FX research, centered on the theme that market optimism is weakening the USD outlook. The report analyzes expectations for de-escalation in the Iran conflict, oil prices failing to continue rising under an extreme supply disruption scenario, relative rate-differential shifts in the US, Europe and the UK, uncertainty around Bank of Japan policy, and the post-election repricing of HUF in Hungary. The overall conclusion is that the market has shifted from pricing geopolitical shock to pricing risk-asset repair and a cautious USD outlook, and UBS is currently not prepared to bet against the trend by buying USD.

Core views

First, although the Iran-related talks have not produced a formal agreement, the market is focusing more on the possibility of continued talks and de-escalation before the ceasefire deadline, which is improving risk sentiment. Second, Brent and WTI are trading below the extreme levels UBS had expected under a disruption scenario, showing that the oil-shock support for the USD has not materialized. Third, EURUSD has returned to around 1.1800, and together with the narrowing US-Germany 2-year spread and the improvement in the UK's relative spread versus the US, the USD lacks strong support. Fourth, the delay in BoJ hike expectations is keeping JPY under pressure, but USDJPY around 160.00 may still be constrained by intervention from Japan's Ministry of Finance. Fifth, post-election EU fund unlocks in Hungary, along with expectations for fiscal and growth repricing, support further HUF appreciation, and UBS prefers HUF over PLN.

Analysis framework

The report combines macro event scenario analysis, cross-asset price responses, rate-differential changes, option trading structures, and balance-of-payments/real effective exchange rate frameworks. For the USD, it focuses on the combined signals from de-escalation in the conflict, oil prices, and equity risk appetite; for JPY, it incorporates Japanese policy communication, rate pricing, and intervention risk; for HUF, it uses EU fund flows, current account shocks, REER elasticity, and portfolio flows to estimate the potential downside in EURHUF.

Methodology notes

• Macroeconomic scenario analysisGeopolitical de-escalation and risk appetite framework

  Links the Iran conflict, restricted access to the Strait of Hormuz, oil prices, and the recovery in global equities to assess whether USD safe-haven demand can persist.

  If the market believes the conflict can de-escalate and oil prices do not stay elevated, the USD support from the energy shock and safe-haven flows will weaken.

• Interest rate and FX analysisRelative 2-year spread framework

  Explains EURUSD and GBPUSD through changes in 2-year spreads between the US and Germany, the UK, and other markets.

  The US-Germany 2-year spread narrowed from about 138bp before the conflict to about 120bp, while the UK's relative 2-year spread versus the US also improved materially, reducing the USD's rate advantage.

• Options strategyDigital options and RKO structures

  Uses the GBPUSD 1.4000 digital call and the USDJPY 154.30 call with RKO at 162.10 to express nonlinear FX views.

  The GBPUSD digital call preserves exposure to a rapid USD selloff; the USDJPY RKO captures upside participation in USDJPY carry while using an upper barrier to avoid intervention risk.

• Balance of payments and valuationEU fund flows and REER elasticity framework

  Uses EU fund unlocks, energy-price shocks, the current account, and real effective exchange rate elasticity to estimate HUF repricing room.

  UBS believes EU fund inflows can more than offset the current account deterioration caused by higher energy prices and support a roughly 10% appreciation in HUF REER, corresponding to EURHUF 355-360.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• USD

  Core asset under analysis

  Strengths

  Typically benefits when geopolitical conflict escalates, oil prices shock higher, and safe-haven demand rises.

  Weaknesses

  Oil prices failing to stay high, improved risk sentiment, narrower US-Europe spreads, and expectations for a dovish Fed all weaken USD support.

  Comparison

  Its rate advantage versus EUR and GBP has declined, and the report is not prepared to buy USD against the trend at this stage.

  Risks

  If the conflict escalates again, oil prices surge materially, or US real Treasury yields rebound, the USD could strengthen again.

• EURUSD

  Main expression of the USD outlook

  Strengths

  Improving market risk appetite and narrowing US-Germany spreads support a rebound in EURUSD.

  Weaknesses

  The current level of around 1.1800 is already above UBS's near-term target of 1.1600, and further upside requires more USD-negative catalysts.

  Comparison

  Like the S&P 500, EURUSD has essentially returned to pre-conflict levels.

  Risks

  If European risk premia rise again or USD safe-haven demand returns, EURUSD could pull back.

• GBPUSD

  Option exposure to a fast USD selloff

  Strengths

  The UK's relative 2-year spread versus the US is at its strongest level since 2008, supporting the decision to keep upside option exposure.

  Weaknesses

  Lower FX-implied volatility means the probability of GBPUSD reaching 1.4000 has fallen.

  Comparison

  Compared with outright spot longs, a digital call is a better way to express a tail upside scenario.

  Risks

  If G10 FX remains range-bound, the option may fail to pay off.

• USDJPY

  A structural trade between JPY weakness and intervention risk

  Strengths

  Delayed BoJ hikes, low real rates, and JPY's funding-currency role support USDJPY strength.

  Weaknesses

  Broader USD pressure and intervention risk from Japan's Ministry of Finance limit upside above 160.00.

  Comparison

  UBS uses a USDJPY call RKO rather than an unlimited upside long to reflect the upper-barrier risk.

  Risks

  If Japanese policy turns more hawkish or the government intensifies FX intervention, USDJPY could fall back.

• HUF

  Preferred Central and Eastern European currency

  Strengths

  Tisza's victory, EU fund unlocks, reform expectations, and portfolio inflows support HUF appreciation.

  Weaknesses

  There is uncertainty over whether EU funds will actually be traded in the FX market.

  Comparison

  UBS continues to prefer HUF over PLN and has shifted to short PLNHUF.

  Risks

  If reform progress is slow, the fiscal position is worse than expected, energy prices stay elevated for longer, or fund inflows fail to materialize, HUF upside will be limited.

• PLN

  The weaker comparison asset in the HUF relative trade

  Strengths

  If regional risk appetite improves, PLN could also benefit.

  Weaknesses

  High energy prices, low real rates, little appetite for hikes from the central bank, and a fiscal deficit above 7% of GDP make PLN relatively vulnerable.

  Comparison

  UBS prefers HUF over PLN in CEE.

  Risks

  If Polish policy turns more hawkish or fiscal risks ease, PLN could recover relatively.

• Oil / Brent / WTI

  A macro input variable for USD and global risk appetite

  Strengths

  If the Strait of Hormuz remains constrained for a long time, oil prices theoretically face upside risk.

  Weaknesses

  The report observes that oil prices have not managed to stay high, and the market is placing more weight on the de-escalation narrative.

  Comparison

  Actual oil price behavior is below UBS's earlier extreme predictions under the disruption scenario.

  Risks

  If supply disruption persists until month-end or longer, oil prices could rise again and change the FX framework.

Key data

• EURUSD spot levelaround 1.1800It has returned to pre-Iran-conflict levels and is above UBS's current near-term target of 1.1600.
• US-Germany 2-year spreadaround 120bpIt was around 138bp before the conflict and narrowed to about 107bp on April 7.
• GBPUSD option view8 Jul'26 GBPUSD 1.4000 digital callUBS continues to hold this position to retain upside exposure in a scenario of rapid USD weakness.
• USDJPY option view8 Jul'26 USDJPY 154.30 call with RKO at 162.10Recommended since January 8; the core logic is that JPY is weak, but upside in USDJPY is constrained by intervention risk.
• BoJ hike pricingabout one-third probability of a hike at the April 28 meetingA full hike is mainly priced for the July 31 meeting.
• Brent scenario comparisonThe disruption scenario had expected front-month Brent to reach $150 by month-endThe report says June Brent and May WTI are both below $100, and dated Brent is about $132, below the April 7 high of $144.46.
• EURHUF target range355-360UBS expects EURHUF to decline further over the coming months.
• EU fund scaleabout 2.5% of GDP in both 2026 and 2027UBS believes this is enough to offset the 1%-1.5% of GDP deterioration in the current account caused by higher oil prices.
• PLNHUF tradeshort PLNHUF, target 83UBS prefers HUF over PLN in Central and Eastern Europe.

Impact & implications

The report's core investment implication is that the USD is no longer receiving one-way support from geopolitical conflict and oil shocks, and FX markets may need to reprice for US real-rate support, de-dollarization discussions, and Federal Reserve policy risk. For G10, it remains worth retaining exposure to a GBPUSD upside scenario, while USDJPY is better expressed through a structure with an upside cap. For Central and Eastern Europe, political change in Hungary and the unlocking of EU funds may lead to further HUF repricing, while PLN looks relatively vulnerable against a backdrop of high energy prices, low real rates, and fiscal loosening.

Risks

• The Iran conflict or Middle East tensions could re-escalate, driving higher oil prices and renewed USD safe-haven demand.
• If the Strait of Hormuz remains constrained or deteriorates further, energy prices could move back toward disruption-scenario levels.
• Fed chair nomination hearings or policy communication could alter the market's view of the USD's real-rate support.
• Japanese Ministry of Finance intervention or an unexpectedly early BoJ hike could disrupt the USDJPY carry trade.
• If Hungary's new government cannot quickly advance EU fund unlocks, the HUF repricing thesis could be delayed or fail.
• If EU fund inflows do not actually translate into FX-market buying, EURHUF downside could be limited.
• Lower FX-implied volatility and a range-bound trading environment may reduce the profitability of option strategies.

What to watch

• Whether Iran-related talks continue to advance before the April 21 ceasefire deadline.
• Whether the Strait of Hormuz blockage or constraints end, and whether Brent, WTI, and dated Brent prices rise again.
• Whether EURUSD remains around 1.1800 or moves further away from UBS's 1.1600 near-term target.
• Changes in US-Germany and UK-US 2-year spreads, and the market's repricing of the ECB, BoE, and Fed policy paths.
• Whether the Bank of Japan hikes at the April 28 meeting and whether pricing for the July 31 meeting continues to move forward.
• Whether USDJPY breaks or approaches 160.00 and triggers stronger verbal or actual intervention from Japanese authorities.
• The composition of Hungary's new government, the pace of legislation to unlock EU funds, and the assessment of underlying fiscal conditions.
• Whether EURHUF moves toward 355-360 and whether stronger repricing conditions emerge toward 340.
• Whether PLNHUF moves toward the 83 target.