Currency Outlook: First Quarter 2025

By David Grimaldi, Foreign Exchange Sales Consultant

In December, the Federal Reserve as predicted cut 25 base points (bps). The surprise was the dot plot for 2025 is calling for only two cuts in the next year as opposed to the four expected. Equity markets sold off on this correction, but this change in the dot plot seems to be more in line with what the markets think will be an overheating economy in the U.S. this year. Since the November U.S. election, the dollar index has gained 8%. Global factors are contributing to the dollar strength as the lame duck governments are starting to impact global investment. Elevated tensions between Ukraine and Russia have emerged after President Joe Biden authorized use of American long-range missiles into Russia. President-elect Donald Trump promised to reverse the policy when he takes office. A list of governments are now in flux putting 2025 budget policies into question along with political stability.

Canada — Prime Minister Justin Trudeau announced on January 6 he would resign. He was facing pressure from Parliament to step down as confidence in his ability to lead was questioned after a number of failures by the Ministry of Finance leader Chrystia Freeland, who resigned in December. Trump’s tariffs threats of 25% have forced the ruling Liberal Party to reposition itself for next year’s elections. Polls over the last 18 months are setting up the Conservative Party for a resounding win with Pierre Poilievre as PM.

Germany — The German government also fell apart in December as Chancellor Olaf Scholz lost a confidence vote in Parliament. Europe’s largest economy will be relegated to a caretaker status ahead of next year’s elections. Germany is facing multiple crises, including escalation in Ukraine and Russia’s threat of nuclear weapons; backlash against immigration; rebuilding the military; and a struggling economy. Conservative Freidrich Merz is polling ahead of Scholz and is expected to be the next chancellor.

France — Emmanuel Macron is facing similar issues, and was just recently named the fourth Prime Minister of the year. The right wing National Rally party and the left wing New Popular Front joined forces to force out the previous PM Michel Barnier. Marine Le Pen meanwhile increased her chances of succeeding Macron if he can’t get the government in order before his term ends in 2027. France is facing aging working class, slow growth, and excessive government spending.

United Kingdom —Labour Party leader Keir Starmer won a decisive election this summer, but things have not gone well since. In the latest poll in December Starmer has an approval rating of 38, which is 49 point drop from July. Labour’s budget is expected to include tax increases on an already strapped economy that has suffered larger inflation issues than other countries in Europe. Stammer recently admitted mass migration to the U.K. was by design, as 900,000 migrants entered last year. The asylum system cost 5 billion pounds per year. A petition for a new general election was to be voted on the first week of January, and Nigel Farage has criticized both Labor and Tories for the deliberate housing of asylum seekers in hotels at the government’s expense.

South Korea — President Yoon Suk Yeol was impeached in December after he declared martial law to stifle weeks of protest and political turmoil. He will now face South Korea’s top court to determine if he will be removed from office. This process could take up to six months. Meanwhile, the country is faced with economic challenges, Trump’s pledge to levy tariffs and gross domestic product (GDP) at its lowest level in more than a year.

Additionally, tax cuts and tariffs could also add to the dollar strength and drive the range of EUR/USD to 1.0500-1.0000 in early 2025. Trade policy, budgets deficits and reduced Fed support could be bearish on the dollar for Trump’s second administration. Trump’s proposed new Secretary of the Treasury Scott Bessent has, in some statements, been open about weakening the dollar. Bessent was a currency trader and famously worked with George Soros when they sold pounds against the British government in the early 1990s. An increase in global risk appetite could lead to a dollar correction especial if global risks subside.

EUR/USD

The story of EUR/USD in 2024 was a narrow range that led to a lot of second guessing ahead of the U.S. election. The U.S. recession never came as many predicted. Volatility in the forward curve in late 2023 led to many false breakouts as the range was tame most of the year. Expectations are that a second Trump administration will be dollar positive. Trump brings a more business friendly environment spurring global investment and should result in a slower path of rate cuts. Bessent may look to talk down the dollar if tariffs are put in place against trade partners. Trump tariff threats will, in most cases, not become policy, just a negotiating tactic for improved trade terms. European Union underperformance should promote cutting rates at a faster pace than the U.S. keeping downward pressure on the EUR/USD. That was confirmed in December as the Fed now will cut only twice in 2025.

GBP/USD

Vanguard made a forecast in December that the Bank of England will make four rate cuts in 2025 to 3.75%. It believes that the cracks appearing in the labor market will lead to a more aggressive easing cycle. The growth outlook for the U.K. is beginning to look bleak, as the contraction in Q4 providing momentum for next year. Talk of cutting rates could be premature as inflation hit an eight-month high in November, as transportation, recreation, clothing and alcohol all increased in prices. Sterling has stabilized for the moment after dropping to 1.2400 post-election. Key support is now at 1.2300 and will need a close above 1.2900 to regain upside momentum.

USD/JPY

Is the end of the carry trade upon us? Global economies have started a rate-cutting cycle that should continue into 2025. Japan has finally pivoted from zero interest policy, but rates are still excessively low, creating an opportunity to borrow yen at a low interest rate and invest in the higher interest rate country. Japan has been more than happy to have other countries lower interest rates rather than raise rates themselves and spook markets. Japan has had excessively low interest rates for decades and its aging population has resulted in a low-growth economy. The USD/JPY pair hit levels in 2024 that we have not seen since the 1980s, and the central bank does not have the funds for an extended fight to protect its currency. Bank of Japan held off on hiking rates in December, as it determined it needed more information on rising wages and Trump’s tariffs in early 2025. This has seen USD/JPY climb closer to the 160 level where intervention to suppress the dollar rise may resume.

USD/CAD

Source: TradingView

The political turmoil in Canada has added to shorts against the USD that started after 1.3875 broke in October. Oil has seen a steady drop since Trump’s election, and expectations are that he will pursue energy independence in the U.S. again by increasing oil production. Oil is the number one export for Canada and is strongly correlated to CAD strength and weakness. The U.S. is also the top importer for Canada’s oil. The threat of a 25% tariff has caused political upheaval as the Liberal Party tries to hold onto power. The new year could be dismal for CAD with lower oil and tariffs, pushing the pair beyond 1.4500.