After two years of US exceptionalism, US economic data have come to a point where a strongly restrictive monetary policy no longer appears justified. Inflation has returned to target and the labor market has started to loosen to a point where it is unlikely to exert material inflationary pressure anymore, UBS said.
As a result, the Federal Reserve started cutting its policy rate at the September meeting by 0.5 percentage points, “and we expect the central bank to bring the rate closer to the neutral rate in the coming quarters,” analysts at the Swiss bank said, in a note dated Oct. 17.
Falling rates in the US are likely to undermine the most important driver of the USD. The fact that the US paid the highest interest among G10 countries in recent years and even a higher interest than some emerging market countries allowed the US to finance its twin deficits.
However, the lower the US yield goes, the more attractive investments outside US tend to become on a relative basis. The erosion of the US yield should therefore lead to a partial reduction of the USD’s overvaluation.
“We expect the greenback to weaken by mid-single digits over the next 12 months,” UBS added, and “the most attractive USD alternatives can be found in the CHF, the GBP, and the AUD.”
Switzerland has one of the lowest interest rates globally, which means that it has not a lot to cut in a global easing cycle, the Swiss bank added.
“On a relative basis, this supports the CHF as yield differentials are getting less negative for the CHF. We expect the USDCHF to trade at 0.80 in 3Q25.”
In the UK and Australia, the mix of inflation and economic growth dynamics doesn’t justify an aggressive easing cycle.
“Accordingly, UK and Australia yields, which are currently the highest in G10, will likely stay high, taking the pole position from the USD,” UBS said. “ In a non-recessionary environment where risk-taking carries on, there should be continued support for both the GBP and the AUD going into 2025.”
AUD/USD and GBP/USD are expected to trade at 0.75 and 1.38, respectively, in 2H25.
At 09:15 ET (13:15 GMT), USD/CHF traded at 0.8658, AUD/USD at 0.6715 and GBP/USD at 1.3057.
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