Investing.com – The Federal Reserve kicked off its easing cycle by cutting interest rates by 50 basis points, while the Bank of England is seen as moving on a more gradual easing path. UBS said this divergence should continue to fuel positive investment flows into GBP/USD.
The USD/JPY pair was down 0.2% at 1.3382 at 08:35 ET (12:35 GMT), but the pair has risen about 1.3% over the past week.
The Fed’s rate-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 chart suggests another 50 basis point cuts in total across the remaining two meetings of the year.
On the other hand, inflation in the UK has proven to be more persistent than policymakers had hoped, so the Bank of England is likely to adopt a more gradual path of monetary easing than the Fed.
“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 aggressively in the coming months and quarters, especially compared to the Bank of England,” UBS analysts said in a note dated September 24.
The bank added that this would reduce the return advantage over the US dollar, which has been a supportive factor for the currency in recent years.
“As a result, we expect some of the current overvaluation of the US dollar to fade over the coming months and quarters.”
UBS added: “While short-term setbacks are possible after the recent rally, we believe the pair will continue to find support and expect a rise to 1.38 by the end of September 2025.”