This overview provides a detailed analysis of currency trends for 2025, focusing on the Pound Sterling (GBP), US Dollar (USD), and Euro (EUR). It highlights expected performance amid shifting economic conditions, key policy changes, and market dynamics. From projected exchange rate fluctuations to the broader implications for businesses and individuals, this update is designed to keep you informed and prepared for the year ahead.

USD – A Defining Year for the Dollar

Current Outlook

The Dollar is set to experience a landmark year in 2025, driven by the economic policies of President Trump’s return to the White House. The anticipated ‘Trump Trade’ policy focuses on protectionism, prioritising American businesses and reducing reliance on imports. High tariffs, a signature strategy, are expected to pressure key trading partners, particularly the Eurozone and China – potentially resulting in a prosperous Dollar.

Key Influencing Factors for 2025

• Trade Policy: Trump’s push for reshoring manufacturing and incentivising domestic investment aligns with reduced trade reliance on China, reinforced by Secretary of State nominee Marco Rubio’s equally hawkish stance on China.
• Energy Trade: Trump has demanded the Eurozone increase purchases of American gas and oil to address its trade deficit with the US, further supporting Dollar strength as further gloom awaits the struggling Eurozone.

Forecast

The Dollar should overperform, with the Dollar Index potentially reaching levels that have not been since 2008 during Trump’s ‘honeymoon period’. While USD pairs are expected to reflect this strength, it is essential to consider the inherent volatility associated with Trump’s leadership style and personality. However, unlike 2016, Trump enters 2025 with a more prepared and strategic approach. His ‘Trump Trade’ policies are anticipated to drive significant gains for the Dollar, fostering a thriving economic environment.

• EUR/USD: The Euro is likely to fall further, stabilising below 0.97, marking the decade’s lowest point so far.
• GBP/USD: While the Pound will also feel the pressure of a strong Dollar, it is expected to fare better than the Euro, bolstered by the UK’s reinvestment policies under Prime Minister Keir Starmer. As the Dollar’s momentum slows later in the year, the Pound may recover some ground, with lows below 1.20, 2025 may end with the Pound being restored above 1.30.
• ‘Trump Trade’ shares clear similarities with ‘Reaganomics’, particularly in its embrace of economic nationalism and scepticism toward global trade systems. During its ‘honeymoon period’, Reaganomics propelled the Dollar to record highs, and with similar underlying philosophies, Trump Trade is poised to potentially drive the Dollar Index to new heights.

EUR – Turbulent year awaits the Eurozone

Current Outlook

The Eurozone faces a challenging 2025, weighed down by political instability, economic fragility, and external pressures. Germany, the bloc’s economic engine, is underperforming. While mounting sovereign debt across member states highlights structural vulnerabilities, with France and Italy now ranking two and three on the scale of average debt-to-GDP ratio in the bloc. The manufacturing sector, particularly in Germany, continues to struggle, exacerbated by surging Chinese exports. Furthermore, uncertainty over a post-Brexit trade deal with the UK further dampens market sentiment, as the deal led by Chancellor Olaf Scholz may not be enacted in the promised early 2025, as election polls now favour his exit.

Key Influencing Factors

• Political Volatility: Early German elections in February, triggered by record-low approval ratings for Chancellor Scholz, add uncertainty to the Eurozone’s outlook.
• Sovereign Debt Risks: High debt-to-GDP ratios in France, Italy, and Greece underscore fiscal imbalances, challenging growth prospects across the bloc.
• Manufacturing Decline: Germany’s automotive sector, a cornerstone of EU manufacturing, faces profit warnings and competition from Chinese exports, eroding its dominance.
• Monetary Policy: The ECB is expected to pursue additional rate cuts, likely weakening the Euro further while attempting to stimulate growth.
• Geopolitical Tensions: President Trump’s trade war threats pose external risks, potentially disrupting Eurozone trade and economic recovery.

Forecast

• The Euro is anticipated to remain under pressure in 2025, particularly against the US Dollar, which is expected to strengthen during President Trump’s ‘honeymoon period’. With the ECB signalling openness to further rate cuts and the Eurozone grappling with persistent political and economic challenges,  EUR/USD is projected to decline further, potentially stabilising below 1.00 -continuing the trend of Euro underperformance.
• Similarly, EUR/GBP is expected to maintain stability above the 0.8000 mark, with both currencies lacking the robust market sentiment that will be driving the Dollar’s 2025 gains, an underperforming 2025 awaits.

GBP – The Pound That Lost It’s Crown

Current Outlook

The Pound concluded 2024 with disappointing results despite early predictions of it being the year’s best-performing currency. While there were periods of relative strength, the market reacted negatively to Starmer’s Autumn Budget, which introduced tax hikes and dampened sentiment. The challenge of recovering from the economic turmoil left by the previous Tory government remains significant. Long-term borrowing costs have risen to record levels, further straining the economy and raising concerns about meeting budget borrowing targets.

Key Influencing Factors for 2025

• Government Policies: Starmer’s ‘fixing foundations’ approach emphasises rebuilding the economy, but its impact is unlikely to be immediate. Chancellor Rachel Reeves faces pressure to address borrowing issues while navigating slow economic recovery at the start of 2025.
• Historical Precedent: Comparisons to Tony Blair’s economic revival highlight potential optimism, but the structural challenges of the NHS, transport, and other sectors suggest that meaningful progress may be slow in 2025.
• International Trade: The anticipated generational trade agreement with Germany faces uncertainty due to Chancellor Olaf Scholz’s declining political position. Broader EU-UK trade cooperation, promised for 2026, through the review of the UK-EU Trade and Cooperation Agreement – will also influence long-term prospects but offer limited immediate relief for 2025. However, the potential for such a lucrative opportunity is poised to significantly uplift market sentiment, which currently remains weighed down by a bleak outlook on international trade.
• The Pound remains overshadowed by a robust Dollar, buoyed by Trump’s return and the anticipated “honeymoon period” that typically drives market optimism. This strength in the Dollar is likely to exert downward pressure on the Pound, limiting its potential for significant appreciation in the near term.

Forecast

 The Pound is expected to spend the year striving for stability, as the economy works to overcome both internal and external challenges in its pursuit of growth and recovery. Although sentiment remains subdued, gradual progress from domestic investment initiatives could offer a modest uplift by late 2025, driven by Starmer’s commitment to invest billions in strengthening the UK’s core infrastructure. Improved EU trade relations and a clearer path to economic recovery are anticipated to build momentum in 2025, with significant progress expected to materialise in 2026. However, for 2025, the Pound is projected to remain stable against the Euro and Dollar, with slight upward movement as market confidence in Starmer’s policies slowly builds.

• GBP/USD – potential lows of 1.20, but 2025 could end with the Pound being stable above 1 Pound = 1.30 USD.
• GBP/EUR – lows of 1.17, but 2025 may end with the Pound being restored and stable above 1.20.