Challenges ahead for the euro and pound in 2025
By the OFX team | 10 December 2024 | 4 minute read
In the world of currencies, yoked as they are in pairs, there is a serious elephant in the room: the strength of the greenback.
Since November’s US election, the US dollar has remained strong, with many currency experts projecting a sustained period of US dollar outperformance well into 2025. All based on the anticipation of higher US inflation, driven by President-elect Trump’s proposed tariff increases, the potential inflationary impact of these and the potential for a resultant rethink by the Federal Reserve of its rate-easing cycle.
Two of the currencies most at risk of a period of prolonged underperformance in the face of the US dollar’s strength are the euro and sterling; and each of them has problems of their own that are exacerbating this.
Economic data hasn’t been on their side
In the European bloc, the combination of a lethargic Eurozone economy, deeper European Central Bank (ECB) rate cuts, and the susceptibility of the European Union (EU) to higher tariffs on its exports to the US could keep “fiber” subdued. A fall below parity is certainly possible for the euro in 2025.
Fiber: is the market term for the EURUSD currency pair, so named because it is a newer pair than “cable”, the GBPUSD pair, which itself was named for the communications medium that linked New York and London in the 1860s.
In the UK’s case, weak British economic data has been a weighed on sterling, and if that trend continues, the Bank of England could be compelled to cut rates more dramatically than markets currently expect. In its annual economic survey, the Organisation for Economic Cooperation and Development (OECD) predicts UK Gross Domestic Product (GDP) will rise by 0.9% this year1, a downgrade from its September 20242 forecast of 1.1%. The forecast came after recent data from the UK Office for National Statistics (ONS) showed the economy growing by only 0.1% in the third quarter of the year.
The OECD report predicts the UK economy will grow faster than its European G-7 peers (Germany, France and Italy) in 2025 and 2026. With UK GDP growth firming to 1.7% next year as it is boosted by the large increase in public expenditure set out by the Starmer government in the recent budget.
The prospect of a slower pace in British interest rate cuts compared to elsewhere is helping the Pound Sterling to get an edge on other major currencies against the US dollar, but the UK private sector is still-fragile and some currency pundits see GBPUSD retreating below the US$1.20 mark.
Unexpected political upheavals add further pressures
It should be the euro’s time to shine, considering that over the past seven years, the euro has gained ground every December – capitalising on the US dollar’s seasonal softness. But this year, political instability has hit the euro.
The French minority government was ousted by a no-confidence motion in the National Assembly, the first such removal of a French administration in more than 60 years. Prime Minister Michel Barnier’s 2025 budget plan, which he argued was necessary to stabilise the country’s dire public finances, was defeated by a hard-right and hard-left alliance, engineered to create a majority vote in parliament.
On top of France’s seemingly constant labour strikes and social unrest, the “crise politique” could not help but erode investor confidence in the Eeurozone.
Germany, too, is contending with a fragmented political environment, with the Social Democrat/Green/Free Democrat coalition government falling apart in November, precipitating a snap election in February 2025.
Concerns about competition for energy resources
As if these hindrances were not enough for the euro, the Eurozone has been pitched back into a potential energy crisis. As colder weather forecasts, dwindling storage, and competitive market forces from Asia have begun to pressure gas prices. It’s an unwelcome reprise of its 2022–2023 experience, when a sharp rise in energy prices followed Russia’s invasion of Ukraine and disrupted Russian energy exports to Germany.
European gas prices – as measured by the Dutch TTF hub’s benchmark for gas – have surged to a 14-month high on the back of colder weather tightening supplies and intensifying global competition for LNG. According to Trading Economics3, EU gas storage is now 84.7% full, down from 94.2% last year.
The EU is also raising storage targets for February to prepare for 2025, while concerns linger over supply risks, including the December 31 expiry of a gas transit deal between Russia and Ukraine, which is unlikely to be extended. Wind power may pick up some slack, but energy concerns pose definite pressure on the Eurozone economy.
France, of course, is buttressed by its base load nuclear power source; and intriguingly, the possibility that Germany might re-commission some of its 31 shelved reactors, the last of which was pensioned-off in April 2023, has at least begun to be talked about again.
What’s on the horizon for currencies
For all of the swirling influences that are at play in the currency markets, medium-term relative value comes down to what holders earn – and that comes down to interest-rate differentials. That, and the fact that heightened geopolitical tensions and trade war concerns underpin demand for the US dollar as a safe-haven asset, explains much of the strength of the greenback.
In such an environment, the pound and the euro, like most other currencies, simply find themselves on the wrong side of the cross, while dealing with their own significant issues.