The below key drivers are likely to impact investor risk sentiment and FX markets in February
- Global markets remain volatile as central banks adjust policies and trade tensions escalate.
- Proposed tariffs from President Trump are strengthening the US dollar, but causing pressure for other major currencies.
Read on for insights into factors affecting the key currencies, or download as a PDF.
EUR Euro
The ECB cut rates as the eurozone struggles. Trade tensions with Trump and Germany’s election add uncertainty, keeping pressure on the euro. Another rate cut is likely in March.
January saw the European Central Bank (ECB) cut interest rates by 0.25%, taking the Main Refinancing Rate down to 2.9%, its lowest level since December 2022. ECB Governor, Christine Lagarde warned that the eurozone was facing “headwinds” to its economy. She also stated that the economic was weak with risks “tilted to the downside.” Although the tone from Lagarde was pessimistic it wasn’t anything unexpected and EURUSD remained around US$1.04 throughout the decision and following press conference.
There was limited data throughout January, with monthly PMI data again showing manufacturing to be struggling and the services sector growing at a snail’s pace. Despite inflation pushing up to 2.5% y/y, the ECB is expected to cut interest rates at the March 6 meeting, given the European bloc’s economic growth has slowed to a standstill.
Looking ahead, markets fear the possibility of US President Donald Trump hitting the European Union (EU) with trade tariffs President Trump raised the possibility in comments on January 31, where he complained about America’s trade deficit with the European bloc, and it seems over coming weeks we may see the implementation of extra charges on EU exports, which will likely keep a cap on the EUR value for the time being.
Away from trade, this month’s big event is Germany’s Federal Election due on February 23, with embattled Chancellor Olaf Schulz looking like he could be deposed by the right-wing leader of the Christian Democrats, Friedrich Merz. Any lengthy process to form a coalition government will cause yet more angst for Germany and the eurozone as a whole.
Expected ranges:
- EURUSD 1.02–1.0630
- EURGBP 0.8265–0.8475
GBP Sterling
The pound dipped early but bounced back after upbeat UK data and hopes of avoiding US tariffs. A Bank of England rate cut had little impact, and GBP could climb higher if trade tensions ease.
GBPUSD started the year moving lower with the pair briefly trading under US$1.21 as inflation remaining above target and growing concerns that the UK economy was stagnating created ongoing problems for UK consumers. The pound rallied as we neared February, lifted by softer-than-expected US data and an uptick in business confidence as it was confirmed the UK government was looking to approve a third runway at Heathrow Airport.
Monthly PMI data released on January 24 came in better than expected which helped to lift GBPUSD back to 1.25 where it traded around until the end of the month.
President Donald Trump appears to be wavering on whether to implement tariffs on the UK, highlighting that he had a great relationship with Prime Minister Keir Starmer, despite the differing political views. Although the pound followed the euro lower at the prospect of the European Union (EU) being hit by tariffs it soon recovered, and it seems given the relative even balance of trade between the UK and US (if you use the US governments calculations) it seems more likely that the UK will be spared extra costs on its exports to America. The Bank of England lowered interest rates as expected on February 6, however, the pound’s losses were quickly reversed, and we could see GBP rally a little higher if Trump confirms sparing UK exporters extra charges at the border.
Expected ranges:
- GBPUSD 1.2230–1.2600
- GBPEUR 1.1800–1.2100
AUD Australian dollar
The AUD struggled as Trump’s trade tariffs shook markets. Hopes of a deal boosted it slightly, but more US-China tensions and a possible RBA rate cut could push it lower again.
It was a poor start to 2025 for the AUD. Speculation and concern around the trade platform of the incoming Trump Administration extended the losses incurred in the wake of the US Presidential election, and drove a downturn in risk sentiment. The promise of new tariffs on three key US trading partners (Mexico, Canada and China) drove US dollar gains and forced the AUD to mark new lows not seen since the first weeks of the Pandemic in 2020.
Having slid below US$0.61 the AUD touched US$0.6088 before finding support. Reports an agreement had been reached to postpone the implementation of a 25% tariff on Mexican and Canadian goods sparked hopes that President Trump’s tariff program will be used as a leverage tool in negotiations rather than policy. The AUD has since recovered to trade back above US$0.6250 through early February.
Trade policy will continue to dominate AUD direction through Q1. With a 10% tariff issued against Chinese goods and tensions between the US and China escalating, there is every possibility the AUD could potentially extend through US$.60.
While tariff talk promises to drive direction, the February RBA policy meeting looms. There is growing speculation policymakers will elect to issue a rate cut. While employment data remains robust and inflation sits above target, sluggish growth and a slow-down across key economic metrics may force the RBA to move sooner rather than later in a bid to avoid recession.
Expected ranges:
- AUDUSD 0.60–0.640
- AUDGBP: 0.4900–0.5200
- AUDNZD 1.0950–1.1150
- AUDEUR 0.5900–0.6200
NZD New Zealand dollar
The NZD remains under pressure as Trump’s trade policies shake markets. More tariffs could push it lower, while weak local growth and rate cuts add to the downside risk against AUD and JPY.
New year, same old story. The New Zealand dollar was weaker through January, as speculation and concern surrounding the incoming Trump administrations trade platform drove a downturn in risk sentiment.
President Trump’s promise to issue new tariffs on three key US trading partners (Mexico, Canada and China) drove US dollar gains and forced the NZD to mark new year lows, breaking below US$0.5520 before finding support. The NZD has since recovered to trade back above US$0.56 through early February.
Trade policy will continue to dominate NZD direction through Q1 2025. With a 10% tariff issued against Chinese goods and tensions between the US and China escalating, there is every possibility the NZD could slide back toward January lows and potentially extend below US$0.55. While markets are optimistic an accord will be brokered, President Trump has promised tariff’s will increase substantially if an agreement can’t be reached. As such, we’re keenly attuned to any commentary linked to US/China trade relations. CNY performance will also prove critical and a USDCNY break above 7.30 could trigger further NZD downside.
While US trade policy and the actions of the Trump administration are expected to drive broader market sentiment, domestic NZ economic data will still prove key in marking NZD performance against other key trading partners. With the domestic economy mired in recession and the RBNZ likely to continue easing rates through 2025, there is scope for the NZD to face downward pressures against both the AUD and JPY.
Expected ranges:
- NZDUSD 0.5400–0.5800
- NZDGBP 0.4400– 0.4700
- NZDAUD 0.89–0.91
- NZDEUR 0.5200– 0.5500
USD United States dollar
Trump’s tariffs shook up markets, boosting the US dollar. Geopolitics and more trade moves could hit the euro next, pushing EURUSD lower. The Fed is likely to hold rates steady for now.
Since being sworn in as President on January 20, Donald Trump has wasted no time in signing executive orders and shaking things up including financial markets. The US dollar surged in the aftermath of his election victory in November with EURUSD dropping from around US$1.09 to touch a low of around US$1.0180 on January 12. The pair rallied again as President Trump announced tariffs of 25% on imports from Canada and Mexico, and an additional 10% on China. As a result, the US dollar jumped when markets reopened February 3 with EURUSD gapping down to US$1.0230, around a cent and a half lower than where it finished on the Friday before.
Looking ahead, it seems financial data is on the back seat with geopolitical moves from Trump regarding Israel and Gaza, the ongoing Russia and Ukraine conflict, and further tariff threats are likely to have the largest impact markets.
It seems the Eurozone will likely be next target for tariffs. Should tariffs be implemented, the EURUSD will likely dive rapidly down to parity and possibly lower. There is no interest rate decision from the US Federal Reserve (Fed) until March, and after rates were held at 4.5% at the end of January, markets predict an extended pause from the Fed as the impact of Trump’s decisions play out for inflation and employment.
Expected range:
- DXY 107–111
JPY Japanese yen
The yen had a strong month as the BoJ hiked rates, inflation surged, and economic data impressed. Meanwhile, tariff threats and market uncertainty kept traders on edge, driving currency fluctuations.
It was a markedly better month for the yen with the USDJPY pair surging to a 6-month high of 158.87 ahead of the Bank of Japan (BoJ) monetary policy meeting. This sudden movement prompted the Japanese Finance Minister, Kasunobu Kato to reiterate that the government would take appropriate action against excessive movement on the FX market.
Within a few weeks, the BoJ raised its short-term rate by 25 basis, its highest level in 17 years, boosting the yen and resulting in the USDJPY pair dropping to a 7-week low of 153.72.
On the data front, the consumer confidence index decreased to 35.2 in January 2025, marking its lowest reading since September 2023. The unemployment rate unexpectedly fell to 2.4% in December 2024, and Retail Sales exceeded expectations, rising by 3.7% y-o-y in December 2024. Japan’s Tokyo Consumer Price Index (CPI) rose to 3.4% YoY in January, the highest since April 2023, while core CPI increased to 2.5%, an 11-month-high.
BoJ Deputy Governor Ryozo Himino has stated that the central bank would consider hiking rates further if the economy and inflation align with expectations. However, BOJ Governor Kazuo Ueda has provided little guidance on the timing or pace of future increases.
The yen is likely to fluctuate as markets react to escalating tariff threats and conflicting comments from US President Donald Trump. Although Japan was not directly targeted by the tariffs, its economy, which is heavily reliant on exports and free trade, remains vulnerable to global trade disruptions.
Expected ranges:
- USDJPY 145–157
CAD Canadian dollar
The Canadian dollar fluctuated amid US tariff announcements, initially declining before rebounding as negotiations signalled a potential delay. Trade policy remains a key factor influencing CAD movement in the coming months.
The Canadian dollar had a tumultuous start to 2025, pivoting wildly as markets respond to the US trade policy. The CAD pitched lower leading into the end of January after President Trump confirmed a 25% tariff would be issued against Canadian exports to the US under the guise of national security. The CAD plunged to mark a fresh 5-year low marginally above US$0.6750 before finding support.
After the tariff was issued, reports confirmed that talks between trump and outgoing Canadian Prime Minister, Justin Trudeau, had been positive and ensured the implementation of tariffs would be delayed by 1 month as higher-level negotiations take place. The extension in implementation buoyed market hopes that the US administration will look to use tariffs as a bargaining tool rather than a blunt tool and final policy goal. The CAD recouped losses through early February and currently trades near the 2024 close.
Trade policy will continue to dominate CAD direction through Q1 and we are keenly attuned to commentary and report outlining the progress of trade talks.
Expected ranges:
- CADUSD 0.6700–0.7200
- CADGBP 0.5400–0.5800
- CADEUR 0.6500–0.6800
SGD Singapore dollar
The Singapore dollar dipped before stabilising as the Fed signalled a steady approach. Slower growth and easing inflation led MAS to adjust policy, with trade risks keeping the outlook cautious.
In mid-January 2025, USDSGD softened as investors awaited clarity on US economic policies under the new administration. However, by month-end, the USD rebounded after Fed Chair Powell signalled a patient approach of no rush to adjust policy.
Singapore’s inflation rate dropped to 2.4% in 2024, down from 4.8% in the previous year. The economy expanded by 4.3% y/y in Q4 2024, slowing from 5.4% in Q3, while annual GDP grew 4%, rebounding significantly from 1.1% in 2023. The unemployment rate remained steady at 2%.
The Monetary Authority of Singapore (MAS) eased monetary policy for the first time since March 2020, citing slower growth and inflation. It reduced the slope of the S$NEER policy band while keeping the width and centre unchanged, aiming for medium-term price stability with moderate appreciation. Core inflation forecasts for 2025 were lowered to 1.0-2.0% as inflation fell to 1.8% in December 2024, while GDP growth is projected to slow to 1-3% from 4% in 2024.
Singapore’s economy faces risks from US and China trade war, which could slow growth and raise business costs due to supply chain disruptions. The SGD is expected to stay stable but could see mild depreciation amid slowing growth and external uncertainties.
Expected range:
- USDSGD 1.3400–1.3750
HKD Hong Kong dollar
The Hong Kong dollar strengthened as rising US rates boosted the USD. Weak retail sales and slower growth persist, while the HKMA reaffirmed its commitment to the currency peg amid trade concerns.
In January, the USDHKD pair strengthened as rising short-term US yields and the Federal Reserve’s (Fed) “higher-for-longer” rate outlook increased demand for the USD.
Hong Kong’s retail sales fell 11.5% y/y in December, extending November’s decline. The unemployment rate remained stable at 3.1% in December, and inflation stayed subdued at 1.4%. Economic growth slowed to 2.5% in 2024 from 3.2% in 2023, driven by weaker private consumption. The government expects growth to continue in 2025 but warns of risks from US trade protectionism.
Hong Kong’s economy is expected to grow, but US trade protectionism could weigh on exports, and higher interest rates may persist as the Hong Kong Monetary Authority (HKMA) maintains its base rate at 4.75%, in line with the Fed. The HKMA is closely monitoring trade tensions, with Chief Eddie Yue cautioning that no economy benefits from a trade war.
Amid speculation, the HKMA reaffirmed its commitment to the HKD peg, emphasising that the Linked Exchange Rate System remains stable. The HKD recently reached a 3.5-year high against the USD, nearing the strong end of its 7.75–7.85 band. With $420 billion in foreign reserves, Chief Yue assured that the peg is well-supported. Analysts expect USDHKD to remain firm, particularly as dividend payouts and IPO activity slow, though sustained HKD demand would require stronger foreign investment in Hong Kong stocks.
Expected range:
- USDHKD 7.76–7.80
The economic impact of US tariffs. Read the article.
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