Forex Markets in 2025: Top Predictions

The forex market is poised for significant growth in the coming years. It is projected to reach a staggering US$1.4 trillion by 2030, growing at a CAGR of 8.7%.

As we enter 2025, the forex market is primed for further evolution. In this blog, we will discuss the top forex market predictions for 2025.

EUR to be under pressure still

The Euro is expected to remain under pressure in 2025, driven by diverging economic and monetary policy dynamics. The Eurozone’s recovery may slow due to growth headwinds, prompting the European Central Bank (ECB) to adopt more aggressive easing measures than the US Federal Reserve. 

Analysts predict a EUR/USD range of 1.05 to 1.14 for 2025, with a possible drop below 1.05 as the US-Eurozone two-year swap rate differential widens toward 200 basis points.

Key factors include Trump's trade tariffs, ongoing geopolitical risks in Ukraine and the Middle East, and limited fiscal stimulus within the Eurozone. Elections across EU nations may further fuel political uncertainties, amplifying risk premiums on the Euro. 

Dollar strength to stabilize

The USD is projected to stabilize in 2025 as better fundamentals outside the US gain traction. Slowing US activity, contrasted with potential Eurozone growth surprises, may narrow US Eurozone yield differentials across the curve's 2-, 5-, and 10-year points, supporting a rebound in EUR/USD. 

This dynamic could also bolster the British Pound and Swiss Franc, either through improved Eurozone activity or safe-haven demand during heightened trade disputes.

Investors are advised to leverage periods of Dollar strength to reduce exposure. Strategies include hedging Dollar assets, reallocating cash and fixed income to other currencies, or exiting the risk of further USD strength via options to generate yield. 

Analysts expect EUR/USD to range between 1.05 and 1.12 early in 2025, with a year-end target of 1.12. Selling the risk of EUR/USD and GBP/USD declines or USD/CHF gains may provide attractive opportunities for income-focused investors, mindful of options' inherent risks.

Yen-funded carry trades to lose appeal 

The appeal of Yen-funded carry trades is expected to diminish as global market dynamics shift. Carry trades, which involve borrowing in low-interest currencies like the Yen to invest in higher-yielding assets, have faced significant challenges. Recent Bank of Japan rate hikes have strengthened the Yen, triggering an aggressive unwinding of these trades and causing market volatility.

Experts caution that the unwinding may not be over, as the Yen remains undervalued. Structural changes, such as the Bank of Japan's tightening and the Federal Reserve's easing, are altering interest rate differentials unfavorably for carry trades.

Additionally, Barclays analysts warn that elevated volatility and thin liquidity could further pressure emerging market carry trades. While some believe the worst of the disruption is over, the focus is shifting from speculative carry trades to Japan's domestic growth potential, including corporate restructuring and rising wages.

USD/CNY to weaken 

The Chinese Yuan is set for further weakness as rising US-China trade tensions weigh heavily on market sentiment. Following Donald Trump's re-election, his proposal to impose tariffs exceeding 60% on Chinese imports has raised fears of renewed economic strain, prompting global investment banks to slash their forecasts for the Yuan.

Trump's tariff policies, seen as inflationary, are expected to maintain high US interest rates, strengthening the Dollar while pressuring trading partner currencies. Barclays projects USD/CNY could reach 7.40–7.50, especially if a 20% effective tariff hike shaves 0.7% off China's GDP. 

Meanwhile, Citi estimates a 10–15% tariff would drive a 1.5–2.0% decline in offshore Yuan (CNH), with current levels hovering around 7.15–7.20.

Morgan Stanley highlights reduced US-China trade exposure but warns that sharp Yuan depreciation could trigger capital outflows. To counter this, policymakers may resort to fiscal and monetary easing to stabilize financial markets and offset growth shocks.

Emerging market currencies to face challenges 

Emerging market (EM) currencies will likely encounter hurdles in 2025 due to uneven economic growth, stabilizing credit conditions, and ongoing global trade protectionism.

 Aggregate GDP growth across 23 major EM economies is projected to slow to 3.8% in 2025 from 4.1% in 2024, driven by slower growth in larger economies like China. Smaller EMs, however, are expected to outperform, buoyed by domestic demand and easing inflation.

Credit conditions are forecasted to stabilize, supported by refinancing opportunities, improving cash flow, and rising demand for EM bonds. Sovereign debt-to-GDP ratios in Latin America, Africa, and APAC are set to decline, with significant improvements in Argentina, Angola, and Zambia. 

However, debt affordability challenges persist, particularly in frontier markets like Egypt and Nigeria, where interest-to-revenue ratios will climb to 61% and 46%, respectively.

These dynamics, coupled with regional disparities, will keep EM currencies under pressure, demanding cautious investor strategies.

USD/CHF to rebound 

The Swiss Franc's strength may wane as several factors weigh against its sustained performance. The Swiss National Bank (SNB) projects modest economic growth, with GDP forecasted at 1% for 2024 and 1.5% for 2025. Inflation is expected to decline further, reaching 0.6% in 2025 and 0.7% in 2026, reflecting lower electricity prices and reduced reference interest rates.

However, the SNB's decision to scale back foreign exchange asset reductions signals a diminishing tailwind for the Franc. 

Additionally, the Eurozone shows signs of recovery, with rising credit growth pointing to a potential bottoming out in 2024. As trading volumes normalize post-holidays and money market repricing for rate cuts stabilizes, upward pressure on the Franc may ease.

These factors, coupled with concerns about Franc’s overvaluation, suggest that USD/CHF could experience a rebound, particularly as global market dynamics shift toward a more balanced outlook.

USD/JPY to surge 

The USD/JPY exchange rate is expected to rise in 2025, supported by the Bank of Japan's monetary policy and economic conditions. 

The BOJ has introduced a two-year quantitative tightening plan, reducing its government bond purchases by 400 billion Yen per quarter. This move will gradually lower the BOJ's holdings of Japanese government bonds by about 7-8% by fiscal year 2026. Currently, the BOJ holds 579 trillion Yen in government bonds.

Despite this tightening, the BOJ has indicated flexibility, with the ability to adjust its strategy based on economic performance and inflation trends. The BOJ expects consumer price inflation to reach 2.1% in fiscal year 2025, up from 1.9%, while core inflation will remain steady at 1.9%. Additionally, real GDP growth is projected to rise to 1.0% in 2025.

These factors, combined with reduced bond purchases, are likely to create upward pressure on USD/JPY as the Yen weakens.

USD/MYR on a narrowing yield differential 

BMI, a Fitch unit, has revised its end-of-year forecast for the Malaysian ringgit (MYR) to 4.0 against the US Dollar, up from 4.55, reflecting its strong performance in Q3 of 2024. 

The ringgit gained 12.1% in the quarter, making it the top-performing emerging-market currency in the region. BMI expects the MYR to continue strengthening, with a forecast of 3.55 against the greenback by the end of 2025.

The narrowing interest rate differential between the US and Malaysia, along with resilient GDP growth in Malaysia, is expected to support the ringgit. BMI forecasts Malaysia's GDP growth at 4.7% in 2024, slightly slowing to 4.6% in 2025, while the US economy is expected to decelerate to 1.5%.

The Federal Reserve's rate cuts and Bank Negara Malaysia's hold on its policy rate at 3.0% will further benefit the MYR. Foreign direct investment and portfolio inflows are also expected to remain strong, supporting the currency's outlook.

GBP/USD to remain stable 

Commerzbank anticipates pronounced USD weakness due to more aggressive interest rate cuts from the Federal Reserve, which should support the British pound against the Dollar. The bank predicts GBP/USD could reach higher levels in the short term but may dip to 1.33 by the end of 2025 as the USD recovers.

UBS shares a bullish medium-term view, forecasting GBP/USD to rise to 1.38 by September 2025. However, 1.40 remains a key resistance level, and the US election could significantly influence the exchange rate as uncertainty around the outcome persists.

AUD to continue rising

The Australian Dollar (AUD) is expected to continue rising in 2025, with analysts predicting a potential climb to 70 US cents in the next 12 months. 

Since mid-April, the AUD has risen from 64 US cents to around 67.50 US cents, briefly hitting a six-month high of just under 68 US cents. This surge followed softer-than-expected US inflation data, increasing the likelihood of multiple US interest rate cuts in 2024, which typically weakens the USD.

In contrast, Australia's Reserve Bank is not expected to cut rates aggressively, potentially even raising them if domestic inflation exceeds expectations. This rate differential, combined with rising commodity prices and a healthy trade balance, should support the AUD.

AMP's Shane Oliver forecasts the AUD could reach 70 US cents, though risks, including a global recession or political instability, could temper gains. A stronger AUD could impact Australia's export competitiveness and import costs.

BRL to tumble

Brazil's real (BRL) is set to face continued pressure and could tumble further in 2025 as concerns over persistent inflation and political uncertainty persist. Analysts have raised their key interest rate forecast for the end of 2025, now predicting a 9.75% Selic rate, up from a prior estimate of 9.5%. However, rates for the end of 2024 remain unchanged at 10.5%.

Policymakers, led by Roberto Campos Neto, opted to maintain borrowing costs at 10.5% during their most recent meeting. They cited the need for a restrictive monetary policy due to inflationary pressures, a weaker currency, and resilient service costs.

The real has already fallen 15.2% year-to-date, the largest drop among emerging market currencies. 

Concerns over President Luiz Inacio Lula da Silva's fiscal policies and global risk-off sentiment have fueled investor unease. In addition, Brazil's inflation rate surged to 4.45% in July, driven by rising transportation costs after a hike in gas prices. Core inflation also remains above the central bank's 3% target.

As a result, analysts have revised inflation expectations for 2024 to 4.12%, with projections for 2025 at 3.98%. These inflationary pressures, coupled with a weakening real, suggest continued volatility for the BRL in 2025.

NZD to have a mixed reaction

The New Zealand Dollar (NZD) is expected to fall against the EUR and GBP in 2025 but rise against the USD as the effects of the Trump-era economic optimism fade. 

According to Westpac's November 2024 Market Outlook, the Reserve Bank of New Zealand (RBNZ) is likely to continue normalizing monetary policy, with a 50 basis point cut to the Official Cash Rate (OCR) in November 2024 to support economic growth. 

This could exert downward pressure on the NZD. Westpac forecasts a flat NZD/USD exchange rate of 0.59 from year-end 2024 to 2025. For the NZD/EUR, they predict a fall from 0.55 at the end of 2024 to 0.54 in 2025, while the NZD/GBP is forecast to rise from 0.46 to 0.47. 

Currently, the NZD/USD is showing a declining trend, and predictions suggest it may drop further to 1.682 by November 2025. This indicates that the NZD could face continued weakness in the coming year.

Preparing for the markets as we move into 2025

In 2025, the forex market will see significant shifts, with the Euro under pressure due to slower recovery in the Eurozone and widening interest rate differentials. The US Dollar's strength will stabilize, and it will be supported by global growth in other regions. 

Yen-funded carry trades are said to lose appeal as Japan tightens, while emerging market currencies, especially the Chinese Yuan, will face challenges due to trade tensions. The Australian Dollar is expected to rise, while the Brazilian real and New Zealand Dollar may continue to weaken. Overall, currency movements will be influenced by geopolitical tensions, economic policies, and shifting market conditions.