2025 Outlook: What’s Ahead for Developed Economies and Their Currencies?

Key narratives shaping markets in 2024 include global central banks shifting toward policy easing, persistent concerns over inflation, employment trends, economic growth, the U.S. Presidential election, the accelerating adoption of Artificial Intelligence (AI), and escalating geopolitical tensions in Europe and the Middle East. These factors are expected to influence the global economy in varying capacities for years to come. Meanwhile, hopes for a strong economic rebound in China fell short, hindered by a faltering property market (with homebuyer confidence eroding in an oversupplied economy), ongoing global trade tensions, deflationary pressures, and wary consumers.

Major stock indices worldwide achieved double-digit gains, with several marking new all-time highs. Patient investors were rewarded this year, a development that surprised many analysts and market participants, myself included, at the start of 2024. The AI boom was a significant driver of outperformance, with expectations that this momentum will carry into 2025. The U.S. dollar (USD) also demonstrated robust performance, as evidenced by the U.S. Dollar Index, with three consecutive months of gains heading into year-end. Additionally, U.S. Treasury yields broadly rallied across the curve.

This forward-looking analysis will delve into the U.S., European, and UK economies, offering insights and strategies to navigate what promises to be an exciting yet uncertain year ahead.

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What Lies Ahead for 2025?

The ‘Global Cut’:
In 2024, developed central banks shifted towards a more accommodative stance, adopting an easing bias. Looking ahead to 2025, additional interest rate cuts appear to be under consideration.

Economic Outlook:
How did major economies perform in 2024, and what trajectory can we expect for 2025? Examining their progress and challenges could provide key insights.

The ‘Trump Era’:
What influence could the policies associated with the Trump Era have on markets in 2025? With themes such as deregulation, tax cuts, tariffs, and mass deportations in focus, the year carries a significant degree of uncertainty.

Currency Market in 2025:
What can we anticipate for currency performance in 2025? Analyzing potential trends will be crucial for market participants.

Fundamental and Technical Perspectives:
What are the fundamental and technical indicators signalling the year ahead?

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The ‘Global Cut’

As the title suggests, 2024 marked a year of widespread monetary policy easing across the globe.

With a few exceptions—namely, the Reserve Bank of Australia maintaining its Cash Rate at 4.35% and the Bank of Japan raising its Policy Rate to 0.25%, thereby exiting negative territory—most major central banks adopted accommodative stances. This trend is expected to continue as policymakers shift from restrictive measures toward a more neutral stance.

In what could be termed a ‘hawkish cut,’ the U.S. Federal Reserve (Fed) lowered its target rate by 25 basis points (bps) to a range of 4.25%-4.50% at its final meeting of the year. This marked the Fed’s third consecutive reduction, totaling 100 bps of cuts for 2024.

Despite these cuts, the Fed’s dot-plot projections from the Summary of Economic Projections signaled a notably hawkish outlook. Projections for 2025 and 2026 indicated a slower trajectory of rate reductions, with FOMC participants revising the expected funds target rate for 2025 downward to 50 bps, compared to an earlier forecast of 100 bps.

The Federal Reserve’s economic projections indicate that inflation is expected to accelerate next year. PCE inflation (Personal Consumption Expenditures) is now projected to reach 2.5% by the end of 2025, up from the previous forecast of 2.1%, and 2.1% in 2026, compared to the earlier estimate of 2.0%. Notably, the Fed does not anticipate achieving its 2.0% inflation target until 2027.

Adding to the economic uncertainty are the anticipated policies of President-elect Trump, set to take effect in early 2025, and the dissenting vote from Cleveland Fed President Beth Hammack, who advocated for maintaining the current target rate. These factors make a rate hold at the January meeting almost certain, with markets currently assigning a 92% probability to this outcome. A 25-basis-point rate cut is not expected until the Federal Reserve’s June meeting.

The European Central Bank (ECB) reduced the Deposit rate by 100 basis points to 3.0% during 2024, marking its lowest level since early 2023.

“Unless unexpected developments arise, further rate cuts are anticipated in early 2025, likely in the form of gradual, incremental 25-basis-point reductions. Markets currently expect an additional 125 basis points of cuts by the end of 2025, bringing the deposit rate to 1.75%. Following this, markets project the central bank will maintain a steady policy stance.

However, some analysts argue that the ECB’s efforts may fall short of adequately supporting the eurozone economy, which continues to trail behind the US and the UK. They suggest that the ECB should accelerate the pace of rate reductions. Market participants are therefore expected to closely monitor indicators of economic strain, especially amid mounting concerns over policy inaction in Germany and political deadlock in France. These developments could signal a higher likelihood of more aggressive rate cuts in the coming year.”

The Bank of England (BoE) lowered its Bank Rate by a total of 50 basis points to 4.75% through two rate cuts this year. At its final meeting in December, the Monetary Policy Committee (MPC) was divided, with three members—Deputy Governor Dave Ramsden and external members Swati Dhingra and Alan Taylor—out of nine voting for a rate reduction.

The latest MPC vote signaled a dovish shift and came as a surprise, as economists had anticipated an 8-1 vote in favor of holding rates steady. However, the accompanying rate statement adopted a cautious tone. Governor Andrew Bailey emphasized the central bank’s inability to commit to the timing or extent of future policy easing due to “heightened economic uncertainty.” He also underscored the appropriateness of a “gradual approach” to policy easing.

Market expectations remained steady following the decision. Investors continue to anticipate 50 basis points of rate cuts next year, with the first 25 basis point reduction projected for May.

The BoE’s November Monetary Policy Report revised GDP forecasts upward, predicting growth of 1.7% in Q4 2025 (up from 0.9% in the August forecast), but lowered expectations for Q4 2026 to 1.1% (down from 1.5% in August).

Regarding inflation, BoE economists expect it to rise to 2.7% in Q4 2025 (an increase from August’s 2.2% forecast) before easing to 2.2% in 2026, consistent with earlier projections.

As for Bank Rate forecasts, the BoE projects the rate will stand at 3.7% in Q4 2025 (revised down from 4.1% in August) and remain unchanged at 3.7% for Q4 2026.

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Economic Outlook

Inflation

Inflation has been a central concern for policymakers and investors this year, as many developed economies have either achieved or are nearing their central banks’ inflation targets, typically set at 2.0%. However, progress in managing inflation is expected to decelerate in 2025 due to the potential resurgence of price pressures, with variations across different countries.

In the United States, upward inflationary risks are particularly pronounced, partly driven by policies proposed during President Trump’s tenure, including tariffs and immigration measures. Consumer spending, a key driver of U.S. economic growth since the pandemic, may face headwinds as trade policies lead to higher prices for imported goods such as clothing, automobiles, and steel.

Tariffs, while never directly reducing the cost of goods, influence pricing in complex ways depending on factors such as the availability of domestic substitutes. The degree to which tariffs impact prices will depend on the specific goods affected and the magnitude of the tariffs imposed. Additionally, deportation policies could constrain labor supply, prompting businesses to raise wages to attract workers. This wage growth may, in turn, increase production costs, potentially passing on higher prices to consumers and exacerbating inflationary pressures.

In the eurozone, inflation has significantly eased from its peak of approximately 10.6% in 2022, stabilizing near the European Central Bank’s 2.0% target since the beginning of this year.

Disinflation in the UK – a slowdown in the rate of price increases – has been firmly underway since reaching a peak of 11.1% in late 2022. However, price pressures ticked up for the second consecutive month in November, rising to 2.6%. This follows a stagnating economy and comes after Chancellor of the Exchequer Rachel Reeves’ Budget, which includes plans for a major overhaul of public spending.

In its Economic and Fiscal Outlook published in October 2024, the Office for Budget Responsibility (OBR) projected inflation to rise in the coming year, partly due to the “direct and indirect impact of Budget measures.” The OBR noted, “Inflation is expected to gradually return to the 2% target as the effects of these measures fade and the positive output gap closes.”

Other forecasts suggest that UK inflation will increase in 2025 as well. Analysts at Deutsche Bank predict higher inflation driven by elevated energy prices, while Pantheon Macroeconomics expects inflation to reach 3.0% by April next year.

GDP Growth

When it comes to growth, the US GDP is outpacing other developed economies, surpassing expectations for a significant slowdown. This performance is remarkable, given the challenges of soaring inflation and the most aggressive central bank interest rate hikes in a generation.

In the eurozone, the OECD predicts that growth for this year will finish at an annualized rate of 0.8%, with projections of 1.3% growth in 2025 and 1.5% in 2026. However, 2025 may still pose challenges for eurozone economic activity, with some analysts forecasting ongoing difficulties. These challenges are expected to be further intensified by the anticipated introduction of US tariffs.

Jobs

The latest US jobs report revealed a rebound in November, with the economy adding 227,000 new jobs, following a revised October figure of 36,000 (up from 12,000), which was impacted by weather conditions and strikes. On average, the US economy has added around 180,000 jobs per month in 2024. The unemployment rate rose to 4.2% in November, exceeding expectations, up from 4.1% in October. However, long-term unemployment remains low by historical standards. In terms of wage growth, both month-on-month (0.4%) and year-on-year (4.0%) figures were in line with October’s data, slightly surpassing expectations. Overall, the US labor market is showing clear signs of cooling.

The October jobs report for the eurozone revealed an impressive unemployment rate of 6.3%, marking historic lows. This suggests that the anticipated economic slowdown and signs of reduced hiring have yet to impact the stability of the labor market. Additionally, with wages in the eurozone reaching a record high of 5.5% this year, this could contribute to sustaining inflationary pressures.

In the UK, the most significant takeaway from the latest jobs report was that wage growth exceeded expectations for the three months ending in October 2024. Both regular pay and total pay, including bonuses, increased by 5.2%, up from 4.9% and 4.4%, respectively. This stronger-than-expected wage growth will likely support the argument for the Bank of England to maintain higher interest rates for a longer period in the coming year.

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The ‘Trump era’

In a decisive election victory for Donald Trump on November 5th this year, investors are preparing for proposed policy shifts in early 2025. Following the election outcome, major US equity indices surged, with the S&P 500 recording its largest one-day gain in nearly two years. The US dollar and Treasury yields also rose on the same day.

Looking ahead to early next year, we anticipate Trump will implement immediate tariff increases on imports from China and enact policies aimed at reducing immigration. The 2017 tax cuts are expected to be fully extended, with modest additional tax cuts also likely.

Though Trump has not yet returned to the White House, he is making his presence felt. In late November, just before the Thanksgiving holiday, he suggested the possibility of 25% tariffs on imports from Mexico and Canada, as well as an additional 10% tariff on goods imported from China, all key US trading partners. At the start of December, Trump escalated his stance, threatening 100% tariffs on BRICS countries if they attempted to create a competing currency. Through his social media platform, Truth Social, he further stated:

“The idea that the BRICS countries are trying to move away from the dollar while we stand by and watch is OVER. We require a commitment from these countries that they will neither create a new BRICS currency nor back any other currency to replace the mighty U.S. dollar, or they will face 100% tariffs and should expect to say goodbye to selling into the wonderful U.S. economy. They can go find another ‘sucker!’ There is no chance that the BRICS will replace the U.S. dollar in international trade, and any country that tries should wave goodbye to America.”

The timing of Trump’s policies will likely be crucial as we approach January. If he focuses on implementing tariffs and immigration measures early in his administration, the resulting cost increases for businesses could lead to higher prices for consumers. This, in turn, could contribute to inflationary pressures and negatively impact consumer spending. Furthermore, the introduction of new tariffs and stricter immigration laws may potentially slow US economic growth. The overall impact of these anticipated policies will depend largely on how and when they are executed.

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What to expect from the currency market in 2025?

The currency market in 2025 is expected to be influenced by several key factors, including global economic recovery, central bank policies, geopolitical developments, and shifts in trade dynamics. Here’s what to watch for:

1. Interest Rates and Central Bank Policies: Central banks, particularly the Federal Reserve, European Central Bank, and Bank of Japan, will play a crucial role in shaping currency trends. Diverging interest rate policies between major economies could lead to significant currency fluctuations. If the US continues tightening rates while other economies remain more dovish, the US dollar could remain strong.
2. Inflation and Economic Growth: Inflationary pressures, especially in developed economies, will continue to impact currency markets. If inflation remains elevated, central banks may maintain tighter policies, strengthening their respective currencies. Economic growth will also be a driver—stronger-than-expected growth could support local currencies, while slowdowns could weaken them.
3. Geopolitical Risks: Tensions in key regions (such as US-China relations, the EU, and the BRICS nations) could lead to increased volatility in currency markets. Trade policies, tariffs, and potential new economic alliances (e.g., the rise of alternative currencies) may have a profound impact on exchange rates.
4. Commodity Prices: Currencies of commodity-exporting countries, like the Canadian dollar (CAD), Australian dollar (AUD), and Russian ruble (RUB), will be influenced by fluctuations in commodity prices. A surge in oil or metals prices could boost these currencies, while a downturn could weaken them.