The Federal Reserve and Bank of England Easing Paths: What It Means for GBP/USD
In the world of finance, central bank decisions can have a significant impact on currency movements. Recently, the Federal Reserve has initiated an easing cycle with a 50 basis-point cut, while the Bank of England is taking a more gradual approach. This divergence in monetary policy is expected to influence GBP/USD carry flows positively, according to analysts at UBS.
Key Points:
- At 08:35 ET (12:35 GMT), GBP/USD fell 0.2% to 1.3382, but remains around 1.3% higher over the past week.
- The Federal Reserve has started its easing cycle with a 50bp cut and is projected to continue through 2025, with another 50bps of cuts anticipated across the remaining two meetings of the year.
- On the other hand, UK inflation has proven to be stickier than anticipated, leading the Bank of England to pursue a more gradual easing path compared to the Fed.
UBS Analysis:
Analysts at UBS foresee the Federal Reserve cutting rates more aggressively in the coming months and quarters, given its later start to the easing cycle and higher initial interest rate level. This could diminish the USD’s yield advantage, which has been a key support for the currency in recent years.
The bank also anticipates a reduction in current USD overvaluation over the coming months and quarters. Despite the possibility of short-term setbacks following its recent rally, UBS predicts a rise in GBP/USD to 1.38 by the end of September 2025.
In Conclusion:
The contrasting approaches of the Federal Reserve and Bank of England to monetary policy are likely to impact the GBP/USD currency pair. As the Fed embarks on a more aggressive easing cycle compared to the Bank of England, the USD’s yield advantage may diminish over time, potentially leading to a decrease in USD overvaluation.
Understanding these central bank dynamics and their implications for currency movements is essential for investors and traders looking to navigate the ever-changing financial landscape.
By staying informed and analyzing the latest developments in global monetary policy, individuals can make more informed decisions about their investments and financial future.