Policy divergence should support GBP/USD flows

Investing.com – The Federal Reserve began its easing cycle with a 50 basis point cut, while the Bank of England is seen on a more gradual easing path. This divergence should continue to fuel positive GBP/USD carry flows, UBS said.

At 08:35 ET (12:35 GMT), it was down 0.2% at 1.3382, but the pair is about 1.3% higher over the past week.

The Federal Reserve’s easing cycle finally began with a 50 basis point cut at its September meeting and is likely to continue through 2025. The Fed’s dot plot indicates another 50 basis points of cuts in total in the other two meetings of the year.

On the other hand, UK inflation has proven to be stickier than policymakers had hoped. Therefore, compared to the Fed, the Bank of England is likely to follow a much more gradual easing path.

“With the Fed starting its easing cycle later than most other G10 central banks and from a higher starting point, we expect it to cut rates more sharply in the coming months and quarters, particularly relative to the Bank of England” , analysts at UBS said. , in a September 24 note.

This should reduce the USD’s yield advantage, which has been a support factor for the currency in recent years, the bank added.

“As a result, we expect a current overvaluation of the USD to fade over the coming months and quarters.”

“While short-term setbacks are possible after its recent rally, we believe the pair will continue to be supported and forecast a rise to 1.38 by the end of September 2025,” UBS added.