Written by Convera’s Market Insights team
Payrolls to power dollar’s dominance
George Vessey – FX Strategist
The US dollar defied consensus expectations of weakening last year with a solid appreciation, powered by US economic outperformance, a hawkish repricing of Federal Reserve (Fed) rate expectations, and the Republican’s election victory. The US dollar index has climbed over 20% in the last four years. It rose 7% in 2024, and recorded its highest year-end level in two decades. It’s started 2025 in the same fashion, extending to its highest level since October 2022 last week following strong US data and thin market liquidity.
The US economy was outperforming international peers before the election, forcing traders to scale back Fed easing bets, sending US yields and the US dollar higher. President-elect Donald Trump’s win and the associated policies added to the bullish dollar case. Thus, at this stage, the dollar’s strength should hold into early 2025 thanks to a supportive economic and fiscal backdrop as well as potential tariffs. This week, investors will analyse the minutes from the Fed’s December policy meeting for clues on if and when interest rates will be lowered again. On the data docket, factory orders, job openings and the ISM services figures will be watched closely, but Friday’s jobs report will be the main attraction.
For now, we are not expecting any rapid deterioration in the US labour market. Instead, it might be a more gradual one that is consistent with the Fed staying cautious on easing, especially amidst inflation concerns fuelled more by tariff risks. Fundamentally speaking, there’s little reason to bet against further dollar strength, but it won’t be a linear upward trend in 2025.
Grim start for sterling
George Vessey – FX Strategist
Sterling appreciated against all but one of its G10 peers last year. GBP/NZD recorded its best year since 2006 and rose to its highest level since 2016. GBP/NOK climbed to its highest level since the 1970s. GBP/EUR clocked its highest annual close since 2016. But it was the US dollar that came out on top overall, with GBP/USD falling around 2% and suffering one of its worst fourth quarters on record.
The pound’s strength in the first half of 2024 was steered by a more supportive domestic economic landscape, reduced political premium, relative yield differentials and a healthy risk environment. But these bullish drivers have been fading for months, and 2025 has already seen GBP/USD fall up to 1% lower and to fresh 9-month lows around $1.24. The slide is largely dollar-driven, with the US currency extending its rally on resilient US growth and elevated yields. The pound’s tumble was also more in sympathy with the euro, with the correlation between the two in recent days increasing on concerns about looming tariffs and the rise in European gas prices.
Looking forward, the pound’s path for 2025 may largely depend on how the Bank of England’s (BoE) monetary policy easing path shapes out, and whether dollar strength will persist. On the former, despite amplifying UK-specific concerns, such as December’s manufacturing PMI being revised lower and business sentiment at a 2-year low, money markets are only pricing in around 60 basis points of BoE easing for the year.
In fact, the spread between 2-year GBP and USD swaps and yield spreads has edged higher in the past few weeks, even as GBP/USD has fallen – creating an unusual divergence between rates and FX. Such a mismatch tends to correct, but for now, it seems more likely that markets will add to BoE easing bets rather than sterling recovering.
Negative pressures pile up on euro
George Vessey – FX Strategist
The euro remains plagued by a plethora of negative factors, and is already suffering from the so-called January Blues. EUR/USD kick-started 2025 by falling to its lowest level since November 2022, taking out the $1.03 handle, and hedge funds are raising bets on an extended slide toward parity in the coming months.
Though excess euro pessimism is already near, the euro domestic context, both cyclical and political, remains convincingly euro-negative at this stage. Feeble Eurozone economic growth remains a key concern relative to major peers, even compared to the UK, whilst the looming danger of US tariffs and another energy crisis only exacerbates the fragile situation. The last time EUR/USD hit parity was just after Russia’s full-scale invasion of Ukraine. A big driver of this move was the surge in gas prices and a weakening of the bloc’s terms of trade. Now, gas inventories across the continent are already falling at the fastest pace since 2021, and with the cold weather forecast for northern Europe likely compounding demand for heating fuel, the potential for another energy crisis is back on the radar.
Diverging policy expectations between the Fed and ECB are also helping to drive the euro’s slide, via the widening in the short-dated swap rate differential. The focus this week will be on December’s inflation figures, with a rebound expected in the Eurozone. Any significant upside surprise might curb markets confidence on four ECB rate cuts this year, which in turn, should help the euro stabilise.
European FX off to a weak start in 2025
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 6-10
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
