Currency Outlook: Second Quarter 2025

By David Grimaldi, Foreign Exchange Sales Consultant

The rally in EUR/USD to 1.0950 (as of April 7) may have officially ended the “Trump trade” of buying U.S. dollars, which began last September when polls began pointing to the ex-president’s re-election. Donald Trump’s White House meeting with Ukraine President Volodymyr Zelenskyy on February 28 caused EUR to spike for two reasons. The prospect of a ceasefire or peace accord in Ukraine will direct investment back to Europe. Second, when Trump cut off funding to Ukraine, European leaders agreed to a huge rise in defense spending.

As tariff deadlines came to fruition in early April, equities have had what may be described as a healthy correction of 10% due to many economic uncertainties with the new U.S. administration. It can be argued that this move is just a correction since gold has made new highs, above $3,000, and usually highly correlated to equities. The Federal Reserve System (the Fed) is expecting economic growth to slow in 2025, but has not changed its dot plot from the two expected cuts. In March Trump announced a more targeted approach to tariffs, which may reverse the “Liberation Day” he promised in regard to the early April deadline.

“We need steel, we need pharmaceuticals, we need aluminum, we need a lot of these things that we sort of don’t make anymore, and yet we’re equipped to do it all,” said Trump. He also suggested tariffs on cars would come first. In addition, he promised a 25% tariff on any country buying oil from Venezuela. Trump’s plan of tariffs may increase consumers' costs, but his plan to pass a budget reconciliation and many of his policy points in one bill may not occur until July. Trump has hoped to have the bill on his desk in April to stabilize markets, but some Republicans are suggesting the budget needs a major overhaul and will take longer.

EUR/USD

 

The German Bundesrat approved legislation for a €500 billion fund for infrastructure investment. Additionally, it increased borrowing to facilitate money earmarked for defense spending. This will boost GDP and inflation, which should keep EUR bids on dips. The weaker dollar plays into what the Trump administration desires, even though it is reluctant to admit it. A weaker dollar will increase exports and reduce imports, which will grow the GDP equation. EUR may be headed into a period of more volatility due to uncertainties around tariffs on Europe and potential peace in Ukraine. For two years the EUR has been stable, until a 500-pip spike in early March. Weekly charts indicate support now at 1.0620 (as of April 7). Prices will have to clear the 1.1275 hurdle, or we can expect a reversion to the mean.

GBP/USD

 

Growth in the UK has been below 1% for over three years with growth in the last two quarters hovering close to zero. Expectations have increased and with that the Bank of England is forecasting a less aggressive cycle of only two cuts. Prime Minister Keir Starmer’s Labour Party won a landslide 412 members of a 650-member parliament despite receiving only 33.7 percent of the national vote. Starmer has polled negatively since and is underwater on most key leadership metrics. Starmer has been able to work with Trump, and the surge in GBP is mostly due to the fact the UK looks like it will avoid a tariff war, which sets it apart from its other G7 partners.

USD/JPY

 

The yen carry trade unwound 5% since the beginning of 2025, as risk was sold on the tariff uncertainties for businesses and fear of a U.S. recession that could narrow the interest rates between Japan and the U.S. Japan has insulated itself from rising inflation the last four years, but it has ticked up this year, reaching 4% in January. The Bank of Japan has been more hawkish lately as it increased rates once and have signaled another hike this year. Japan has been amenable to U.S. tariff demands with pledges of direct U.S. investment, but it may not be out of the woods. Trump has promised to tariff cars, which has automakers like Toyota nervous.

Trump did announce flexibility on reciprocal tariffs in late March, which has for now led to some stability in the equity markets. The yen could be headed for more gains if markets focus on the highly correlated 10-year bond yield. In the past couple weeks, chief rates strategists at Barclays, Royal Bank of Canada and Societe Generale have cut their year-end forecasts for 10-year yields in part, they said, because of United States Secretary of the Treasury Scott Bessent’s campaign to drive them lower. It’s not just jawboning, they added, but the fact that Bessent can follow it up with concrete action. He could limit the size of 10-year debt auctions or advocate for looser bank regulations to boost bond demand, or back Elon Musk’s frantic campaign to cut the budget deficit. “What used to be often mentioned in the bond market is the idea of don’t fight the Fed,” said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas SA. “It’s somewhat evolving into don’t fight the Treasury.”

USD/CAD

 

The elevation of Mark Carney to Canadian Prime Minister appears to have stopped the slide of the Liberal Party in polls. Carney has called for a snap election on April 28, as he has tried to raise the poll numbers by stirring up national support against Trump’s jabs for Canada to be the 51st state. The polls show the strategy appears to be working as the Liberal Party has increased in the polls from a 20%-low approval rating to a statistical tie, at 38%, with Pierre Poilievre’s Conservative Party. Poilievre plans to run on change, putting Canadians first, tax cuts and bringing back investment to a country where growth has been less than spectacular the last four years. The Canadian dollar has suffered with the U.S. tariff threats and expectations of increased energy production, losing 10% since September. Any further pullback of the dollar will be dependent on the April tariff deadline and the elections later in the month. Lower energy costs in the end will weigh on the strength of the Canadian dollar medium term.