Foreign Exchange Analysis ~ 25 February 2025

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GB Pound

What happened last week?

GBP experienced gains last week, with cable rising 0.4% and closing above 1.26. On Monday this week, the pound touched a YTD high of $1.269, supported by stronger-than-expected UK economic data and broad-based U.S. dollar weakness. UK retail sales increased 1.7% month-on month in January, the first monthly gain since August 2024, helping ease concerns over slowing consumer demand. Additionally, UK inflation was higher than expected, with CPI rising to 3.0% YoY, diminishing expectations for Bank of England (BoE) rate cuts.

What to watch for in the short-term?

This week, focus turns to comments from BoE policymakers (Monday- Thursday). Markets will closely assess whether the resilience in retail sales and persistent inflation pressures prompt more hawkish BoE commentary. Aside from UK data, GBPUSD will be driven by the wider dollar market sentiment.

What about the coming months?

The pound’s medium-term outlook remains mixed. While the BoE is expected to ease policy in the second half of 2025, stronger than-expected economic data and elevated inflation could delay this timeline. Potential U.S. tariffs on UK exports will continue to be a downside risk for GBP in the coming months.

Calendar

Monday- Thursday | BoE Member Speeches

US Dollar

What happened last week?

The U.S. dollar lost ground against most major currencies, pressured by a changing market perception on Trumps use of tariffs. On the data front, January’s retail sales dropped 0.9%, marking the largest decline in two years, reflecting softer consumer demand. On the other hand, inflation data remained elevated, with CPI rising 0.5% month-on-month (3.0% year-on-year) and PPI exceeded forecasts at 3.5% year-on-year. These figures reinforced the view that the Fed may hold rates higher for longer, pushing back market expectations for a rate cut to late 2025.

What to watch for in the short-term?

Investors will focus on Wednesday’s Federal Reserve meeting minutes, looking for indications of the current inflation outlook and rate path. Thursday’s jobless claims data and will offer further insight into labour market resilience and overall economic health, as well as Personal Spending data release on Friday Any new developments regarding U.S. trade policy could add volatility to FX markets.

What about the coming months?

The dollar’s direction hinges on inflation trends and the Fed’s timing of monetary easing. With markets now pricing c.54bp of cuts in 2025, persistent inflation and global geopolitical risks could continue supporting the greenback.

Calendar

Wednesday 7.00pm | Fed Meeting Minutes

Thursday 1.00pm | US Initial Jobless Claims

Friday 1:30pm | Personal Spending (Jan) 

Euro

What happened last week?

EUR/USD edged higher last week on the back of German elections, but struggled to make material gains as European risks still remain. The region’s composite PMI remained steady at 50.2, with Germany showing manufacturing improvements while France’s services sector contracted. Headline inflation across the bloc remained unchanged YoY at 2.7% and still above the ECBs target.

What to watch for in the short-term?

The week ahead has inflation data from key member states (France, Italy, Spain and Germany), growth data from Germany and Eurozone consumer confidence readings on Thursday. Although, this morning’s German GDP coming in line with expectations, (-0.2% YoY in Q4), the print is a weak outlook for Europe’s largest nation which could possibly push EURUSD interest rate differentials for the remainder of the week.

What about the coming months?

The euro faces structural headwinds, including energy price volatility and muted domestic demand. While 84bp of rate cuts are priced in for 2025, sticky inflation or improved growth could delay easing. Geopolitical risks, especially regarding U.S. trade policies and European energy security, will remain central to the euro’s medium-term outlook.

Calendar

Wednesday 7:00am | German Inflation Data

Thursday 10:00am | Eurozone Consumer Confidence

Friday 9:00am | Eurozone PMI Data

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