EUR / USD
The EUR/USD outlook is being significantly shaped by the evolving trade landscape and monetary policy dynamics. The Federal Reserve finds itself in a challenging position as Trump's tariffs threaten to reignite inflation pressures while simultaneously risking economic growth. This policy dilemma has created uncertainty around the Fed's ability to deliver anticipated rate cuts, with markets now pricing in around 84 basis points of easing for 2025.
The European Central Bank appears to be taking a more optimistic stance on inflation, with French central bank chief Villeroy de Galhau stating there is "currently no inflationary risk in Europe." Recent economic data shows the Eurozone economy growing at a modest pace, with GDP expected to have expanded 0.2% in Q1, though this predates the impact of US tariffs.
The trade tensions have led to increased volatility in currency markets, with the EUR/USD experiencing heightened uncertainty as markets assess the implications of Trump's policies on both economies. Market sentiment appears to be shifting somewhat in favour of the euro as the EU emerges as a relative island of stability amid global trade turmoil. The dollar's traditional safe-haven status is being questioned as some investors grow concerned about the US administration's trade policies and their potential impact on growth.
Although short-term volatility may continue, structural factors such as trade realignment and differing policies between the Fed and ECB could strengthen the euro's long-term position.
USD / JPY
Despite the recent rebound, the USD/JPY outlook faces significant headwinds as the dollar remains weak and the Bank of Japan is widely expected to maintain its key rate at 0.5% during its upcoming policy meeting. Although market participants are closely monitoring potential shifts in forward guidance amid persistent inflation concerns.
Recent US-Japan trade discussions have notably avoided explicit exchange rate targets, though currencies remain an underlying factor in broader bilateral negotiations. Japanese labour market conditions remain tight, with unemployment steady at 2.4%, supporting the case for sustained wage growth and potential monetary policy normalization.
Global trade tensions have intensified following Trump's new tariff announcements, with Japanese officials particularly concerned about their impact on exports and corporate earnings. Given no clarity on the trade conditions between the two economies, we expect the yen to remain within the safe haven territory, creating headwinds for USD/JPY in the near term.
GBP / USD
GBP/USD remained elevated in recent days as the lack of significant trade pressure on the UK is helping to maintain the pound's strength.
Trump's sweeping tariff policies have created significant global trade disruptions, leading to heightened market volatility and economic uncertainty. The Federal Reserve finds itself in a challenging position, balancing sticky inflation around 2.4% against growing recession risks, making near-term rate cuts unlikely despite market pressures. Consumer confidence has deteriorated notably, with the University of Michigan survey showing sharp declines across income groups, largely due to trade policy uncertainty.
The Bank of England maintains a cautious stance amid these global headwinds while watching domestic inflation and growth dynamics closely. These macroeconomic conditions suggest continued strength for GBP/USD in the near term.
