UBS Sees Increased Currency Volatility Ahead

On March 20, 2026, UBS strategists issued a statement warning of a potential rise in forex market volatility in the near future due to prolonged risks from the Iran conflict.

UBS Expects Greater FX Market Stress as Iran Conflict Continues

UBS strategists have indicated that foreign exchange markets are expected to experience greater volatility in the near future, as the ongoing war in Iran is likely to cause prolonged energy supply disruptions and market uncertainty. This has been made at a time when oil prices are rising, and central bank policies are changing.

According to UBS, currency volatility is likely to increase by 4%. It is likely to reach levels last seen during the Covid-19 pandemic in 2020 and the war in Ukraine in 2022. The bank is selling volatility in some currency pairs, but it prefers NZD/USD and EUR/NZD. Central banks such as the Fed, ECB, SNB, and BOJ is cautious on policy direction.

An increase in energy costs and ongoing geopolitical risks have made FX traders more responsive to geopolitical news, and UBS says this may continue to drive FX markets towards wider trading ranges and more volatile moves.

Why This Matters?

Currency volatility affects everything from trade values and company earnings to inflation and investment sentiment. A rise in currency volatility makes hedging more costly, creates uncertainty for multinational corporations, and can amplify shifts in global investment patterns. Here are six important points:

·       Geopolitical Risk Pushing Global Markets Wider: The Iran conflict has introduced fresh geopolitical risks for global markets, forcing traders to factor in a higher risk premium. This has resulted in a wider bid-offer spread and reduced liquidity for certain currencies.

·       Energy Prices Drive Macro Pressure: A rise in oil prices due to supply-related issues is creating inflationary pressures on the global economy, affecting currency valuations. As energy prices rise, central banks face a tough call that directly affects currency values and creates uncertainty in the Forex market's pricing mechanism.

·       Central Banks Policy Uncertainty Rises: With central banks sending conflicting signals as some are adopting hawkish policies while others are taking a dovish approach, the Forex market is witnessing high volatility and unpredictable movements.

·       FX markets could witness levels of stress experienced in the past: Currency volatility could rise to levels seen during the COVID-19 pandemic and the Ukraine war, according to a UBS forecast. During such periods, markets experienced extreme volatility, corrections, and sensitivity to geopolitical and macroeconomic events.

·       Safe-haven flows could realign: Uncertainty in the markets could lead to safe-haven flows into currencies such as the US Dollar, Japanese Yen, and Swiss Franc. On the other hand, currencies such as the New Zealand Dollar could experience sharper, faster movements.

·       Hedging costs could rise: Currency volatility could lead to higher hedging costs via derivatives such as options and forwards. This could lead to higher costs for multinational firms and investors, affecting their financial planning.

FX Volatility Ahead

The UBS warning on currency volatility reflects the rising influence of geopolitical risks, especially the Iran conflict, on the global financial system. Therefore, traders, corporations, and policymakers should be prepared for volatility in the foreign exchange system driven by energy price volatility and policy divergence.