We hope you had an enjoyable break and wish you a happy and healthy 2025.
The FX market was relatively quiet over the festive period. However, the US dollar started the new year on a solid footing – continuing its trajectory from the end of 2024. Strong US economic data, together with the prospect of an ever-rising fiscal deficit and uncertainty surrounding Trump’s tariffs, has continued to encourage investor flows into the safe-haven dollar (and US assets generally). On the opening trading day of 2025, the GBP/USD rate briefly pushed down to the lowest levels since April ’24 (and below 1.24). It’s since recovered around 1% and now trades around the levels just prior to the Christmas break. Markets will be closely watching Friday’s key US jobs figures to provide further clues on the direction of the USD.
The dovish tilt in the Bank of England’s December communications, which unexpectedly had three policymakers voting in favour of an immediate interest rate cut, has created some short-term vulnerability for the Pound. However, markets appear to still be taking the view that any policy cuts in 2025 will be gradual and this has allowed Sterling to hold its own against most major currencies. Underlying this support is the increased expectations of better relations with the EU under the Labour government, a relatively robust macroeconomic performance and a still very attractive valuation for GBP (historically speaking). There’s limited UK data releases out this week, but things ramp up next week with UK inflation, growth (GDP), and retail sales figures.
The Euro has remained under pressure as the gap between market interest rates expectations between the ECB and the Fed rate remains wide. This pushed the EUR/USD to the lowest levels since November 2022 on the opening trading day of the year (into 1.02s). Tomorrow’s latest Eurozone inflation report will be key to gauge the extent to which the ECB can realise the market's generous expectations for cuts during 2025. Another 0.25% rate cut appears effectively set in stone for the central bank’s January meeting, although investors will be far more interested in any comments from President Lagarde that could provide clues as to where the rate cuts may bottom out.
