How the forex market will change in 2025: Predictions and Risks

04, Mar - NEWS

The forex market remains one of the most dynamic financial platforms, responsive to global economic and political changes. In 2025, its development will depend on such factors as monetary policy of leading countries, geopolitical instability and economic imbalances. In this article, we look at the big picture on future currency volatility and helps companies make forecasts in a complex international environment.

Productivity, debt and consumption: What drives the currency market?

The end of 2024 has passed under the banner of American exceptionalism. The US economy continues to surprise experts: it grew by 2.7% in 2024 and is expected to grow by 2% in 2025. In contrast, growth in the eurozone remains anaemic and should be 1% next year.

The dynamism of the United States is based on two factors: US debt and consumption. U.S. debt is growing in a controlled manner, allowing companies to move their production to the United States and make large-scale investments. Labour productivity will reach 3% in 2024, while in the eurozone it is negative or close to 0. Consumption remains another pillar of the US economy, where 30% of the population has a portfolio of financial investments exceeding $500,000, increasing liquidity.

Foreign exchange rates in 2025: Expected trends and risks

In 2025, we will continue to see the superiority of the US economy, while the Eurozone will continue its economic stagnation. This superiority is based on several key factors, such as higher import taxes as well as energy costs in the US, which are four times lower than in Europe. This is a powerful lever to attract business and shift production to the US.

Emerging economies should also show good growth as their economies have become more resilient. They have reduced their dollar debt, which makes them much less vulnerable to fluctuations in the US currency. On the other hand, China may find it difficult to resume growth due to the financial difficulties faced by its banks. In addition, 60 per cent US taxes could cause China's GDP to fall by 1.4 per cent, which would be a major blow to the country's economy.

Europe's weakening economy: How will it affect traders?

Economic stagnation in Europe will continue, but there will be no major crisis. Risks remain in 2025, especially in the commercial property sector, which has weakened since the pandemic and ECB interest rate hikes. There is also the risk of a currency war. Without fiscal stimulus in Europe, the ECB may allow the euro to weaken in the markets. If at the same time the US dollar continues to strengthen, President Donald Trump could intervene as he believes the dollar is overvalued.

We can draw a parallel to his election in 2016, when the euro fell to 1.04 or 1.05 between Q4 2016 and Q1 2017. We saw swings of more than 15% in six months, which is very significant for a liquid currency pair like EUR/USD.

How will conflicts around the world affect exchange rates?

The beginning of 2025 will be marked by a change of administration in the USA, which will inevitably affect geopolitical tensions. All experts agree that the armed conflict between Israel and Iran will continue and that new strikes can be expected. In Eastern Europe, the Ukrainian conflict remains entangled. Russia is likely to maintain a fairly strong military position and may even be tempted to open new fronts to undermine NATO. All of this is likely to have a significant impact on the European currency.

It is too early to tell what impact Donald Trump's policies will have on the direction of the Federal Reserve. It will take time for the effects of his planned executive orders to become apparent. In the meantime, the Fed has plenty of room for manoeuvre to continue its cycle of monetary easing, which should help reduce the burden of US debt in the long term. We can also expect a battle, or rather an outside observation, between the Fed and the ECB. However, the Fed is likely to react to ECB action or inaction if it sees the dollar strengthening too much in the markets.

Conclusion: How the forex market will change in 2025

The forex market will remain highly volatile in 2025 due to a multitude of factors. The dollar is expected to strengthen further on the back of US economic policies, while the euro may weaken due to the Eurozone's economic problems. Emerging markets are showing growth but face domestic challenges such as the banking crisis in China.

Geopolitical tensions and possible changes in central banks' monetary policies create risks for traders and investors. In an unstable environment, it is important to closely monitor the decisions of the Fed and ECB, as their policies may significantly affect the dynamics of exchange rates. In addition, the growing role of emerging markets in the global economy will create additional pressure points on major currency pairs, which will require more flexible strategies from Forex participants. To be successful in forex in 2025, market participants need to take into account global trends, adapt to changing conditions and apply effective risk management strategies.