Currency 2025: Mixed Outlook, Strategic Opportunities
Tuesday 07th January 2025 – 11:11 (GMT)
GBP/EUR: Sterling Eyes Pre-Brexit Highs
The pound surged to a 33-month peak of €1.2150 against the euro in late 2024 as diverging monetary policies between the Bank of England (BoE) and the European Central Bank (ECB) propelled Sterling higher. Analysts are now focussed on whether GBP/EUR can surpass the pivotal €1.22 level which was last seen before the 2016 Brexit referendum.
ING highlights Sterling’s solid fundamentals, noting that a rise in GBP/EUR could revive discussions of pre-Brexit trading levels. “This trend hinges on the BoE-ECB policy divergence,” ING remarked, adding that the UK’s economic outperformance and warmer relations with the EU bolster the pound’s outlook.
However, risks remain. The BoE’s Monetary Policy Committee shows increasing signs of dovishness, with potential for rate cuts as early as February. Meanwhile, the ECB, having already reduced rates to 3%, may continue easing which could initially weigh on the euro but support growth later in the year.
GBP/USD: Sterling Faces Dollar Strength
The pound faces headwinds against the dollar, with GBP/USD slipping to six-month lows below $1.25 following dovish signals from the BoE. While the UK central bank held rates at 4.75% in December, a contentious 6-3 vote for no change signalled growing internal support for rate cuts. ING predicts the BoE may lower rates by 150 basis points in 2025 – far more aggressive than current market pricing.
In contrast, the Federal Reserve remains resolutely hawkish. After cutting rates to 4.5% in December, the Fed indicated just two more cuts in 2025 – a sharp shift from previous projections of four. Chair Jerome Powell’s cautious stance on inflation supports expectations of USD strength throughout the year.
Nordea forecasts GBP/USD could slide to $1.17 by mid-2025, citing US growth resilience and the dollar’s haven appeal. Tariff threats from the Trump administration add to the pound’s challenges, though Bank of America projects a rebound to $1.38 by year-end if the UK economy outperforms expectations.
EUR/USD: Euro Under Pressure Amid Political and Economic Challenges
The euro remains under sustained pressure against the dollar, with EUR/USD dipping to two-year lows near 1.0350 after Trump’s re-election in November 2024. Wells Fargo predicts a slide below parity, projecting a 0.98 target for late 2025, while UBS remains more optimistic, forecasting a recovery to 1.10 by year-end.
The ECB is expected to continue its easing cycle, with additional reductions anticipated in early 2025 to help combat economic weakness in Germany and France. Political turmoil compounds the eurozone’s challenges, with German Chancellor Olaf Scholz losing a confidence vote and French Prime Minister Michel Barnier resigning after failing to pass his recent budget.
Meanwhile, the Federal Reserve’s hawkish stance bolsters the dollar. Limited scope for further rate cuts and Trump’s protectionist policies could exacerbate economic divergence, further weighing on the euro. Despite these challenges, some analysts (including UBS) expect easing political tensions and a slowdown in ECB rate cuts to provide a foundation for the euro’s recovery later in the year.
Summary
GBP/EUR: Sterling reached a 33-month high against the euro in 2024, supported by a yield differential between the Bank of England (BoE) and the European Central Bank (ECB). However, the BoE’s dovish tilt and potential rate cuts in early 2025 may cap gains, while the euro’s outlook depends on ECB policy easing and economic recovery prospects in the eurozone.
GBP/USD: The pound faces significant pressure against the dollar as the Federal Reserve’s hawkish stance and US economic resilience strengthen the greenback. GBP/USD could dip to $1.17 by mid-2025 unless the UK economy outperforms.
EUR/USD: The euro remains under pressure due to political instability in Germany and France, along with aggressive ECB rate cuts. While short-term forecasts point to a potential slide below parity, a recovery is possible later in 2025 as eurozone political tensions ease and economic conditions stabilise.
Hedging
For businesses and investors exposed to currency fluctuations, strategic hedging is essential in this uncertain environment. Medlock & Thames can offer tailored solutions, such as:
- Forward Contracts: Lock in exchange rates for future transactions to protect against adverse movements in GBP/EUR, GBP/USD, or EUR/USD
- Multi-Currency Accounts: For businesses operating across regions, maintaining accounts in multiple currencies can help mitigate transaction timing risks
- Dynamic Hedging: Offering real-time analytics and automated tools to adjust positions as market conditions shift
If you’d like to discuss anything in this article further, please contact myself at [email protected] or +44(0)161 250 3376
All the best for the year ahead,
Christopher Gutfreund
Founder | Medlock & Thames