2025 Market Outlook
At Moneycorp, we always advocate for planning when it comes to foreign exchange. With that in mind, we want to share our insights into the key market trends as we see them for the year ahead.
2025 Market Outlook – Tariffs, trade, terminal rates and political turmoil
19 minute read14 January 2025
2024 was a significant year for global politics with roughly half of the global adult population having the opportunity to vote. Some were unexpected, such as in France, while others occurred earlier than anticipated, like in the UK, and now (at the time of writing) Canada. The outcomes of these elections, including in the US, led to increased uncertainty in various economies and contributed to political instability in some regions.
2025 has further risks in-store. In this article we will outline the key risks as we see them, and what it could all mean for economies, markets, monetary policy and more.
A look back at 2024 – unexpected outcomes and political upheaval fail to dent markets
The media badged 2024 as the year when inflation would fall back to target, global interest rates would fall steadily from their highs and global politics would stabilise, with a record number of elections due over the course of 2024. As the fireworks of the new year’s celebrations faded, so too did the optimism around a ceasefire between Russia and Ukraine or Israel and Hamas, and quickly thereafter optimism around interest rate cuts in the major economies began to fade as well.
Entering the year, the headline US consumer price inflation rate was measured at 3.1% Y/Y (Nov-23), in the Euro Area headline CPI inflation was 2.4% Y/Y, and the UK’s headline CPI inflation rate was 3.9% Y/Y. Against that, official interest rates for the US, Eurozone and UK were respectively 5.5%, 4.5% & 5.25%.
In politics, the world eagerly awaited the outcome of the US Presidential, Senate and House elections (held on the November 5th), developments in UK politics with Labour holding an average 18-point polling lead over the Conservatives, and the outcome of European Parliamentary elections (June).
The Republican frontrunner for the US Presidency was former President Donald Trump, who was looking to reclaim the Presidency and serve two non-consecutive terms for the first time since Grover Cleveland in 1893. Despite facing a number of widely reported challenges, he seemed to have little material challenge from rivals for the Republican nomination. President Biden dropped out of the race in July, and Vice President Harris became the Democrats nominee. Trump defeated Harris comfortably, winning 312 of the 538 electoral college votes as well as the popular vote, and the Republicans retained control of the House and regained control of the Senate.
In Europe, the European parliament elections resulted in a significant defeat for the French government, leading President Emmanuel Macron to call a snap parliamentary election. This election also ended in defeat for President Macron’s party, with the left-wing Front Populaire coalition and the right-wing National Rally (formerly the National Front) gaining over 100 seats from Ensemble and Les Républicains. French politics remained unstable through the end of the year, culminating in Prime Minister Michel Barnier being ousted in a no-confidence vote on December 4th. Meanwhile in Germany, the traffic light coalition between the SPD and Greens collapsed on November 6th, prompting a Federal election scheduled for February 23, 2025, seven months ahead of planned elections.
In the UK, a snap election was called by Prime Minister Rishi Sunak for July 4th, which resulted in a Labour Party win, with its largest majority (174 seats) since 2001. The Conservative Party suffered its worst result in its history in relation to seats, losing 251 seats, whilst the Liberal Democrats secured the best result since 1923, taking 72 seats. The incoming Labour government had to contend with a global IT outage, riots, and a widespread backlash against the removal of the winter fuel allowance for around 5/6ths of pensioners.
Financial markets overview for calendar year-end 2024:
Equity markets - 2024 YE close
The S&P 500 closed out 2024 at 5882.
The Euro Stoxx 50 at 4869.
The FTSE 100 at 8173.
Exchange rates – 2024 changes
EUR/USD dropped 5.9% in 2024.
GBP/USD dropped 1.4% in 2024.
GBP/EUR rose 4.6% in 2024.
USD/CAD rose 8.4% in 2024.
USD/MXN rose 21.6% in 2024.
USD/BRL rose 27.4% in 2024.
Interest rates
US Fed Funds: 4.5% (5.5% as at Jan 1,2024)
Euro Area 2-week refinancing rate: 3.15% (4.5% as at Jan 1, 2024)
UK bank rate: 4.75% (5.25% as at Jan 1,2024)
Canada overnight rate: 3.75% (5% as at Jan 1, 2024)
Mexico overnight rate: 10% (11.25% as at Jan 1, 2024)
Brazil selic rate: 12.25% (11.75% as at Jan 1, 2024)
US 10y Treasury yield: rose 60 basis points in 2024
EA 10y government bond yield: rose 16 basis points in 2024
UK 10y gilt yield: rose 93 basis points in 2024
CAD 10y government bond yield: rose 6 basis points in 2024
BRL 10y government bond yield: rose 473 basis points in 2024
MXN 10y government bond yield: rose 139 basis points in 2024
2025 key themes
1. Deflation in China
China is experiencing a significant economic slowdown, with persistent real estate problems, weak domestic consumer demand, and challenging external expansion. The labour market faces growing challenges due to an aging population and a low birth rate.
Several key questions arise:
- Will these issues prompt a shift in the Chinese renminbi?
- How will Trump’s tariff threats, anti-dumping legislation, and weak global activity influence China’s fiscal and monetary policies?
- Could China’s export deflation to other major economies affect global monetary policy?
2. Global politics
Geopolitical risks from Russia & Ukraine, Israel & Hamas/Yemen/Lebanon/Iran, and China & Taiwan persist. Finland recently accused Russia of damaging power and data cables on the Baltic Sea floor. China imposed an export ban on US firms over Taiwan arms sales, while ceasefire efforts between Israel and Hamas have not progressed. US President-elect Donald Trump has also refused to rule out military or economic intervention over Panama and Greenland, which he stated were needed for ‘economic security’.
This year, Germany will hold a Federal election in February, France continues to face political and fiscal challenges. Canada will also host parliamentary elections this year, due by October, however Prime Minster Trudeau’s resignation at the beginning of January could impact timelines. Canadian Parliament is now suspended until late March.
We will be keeping an eye on how these elections and geopolitical risks impact currencies, commodities, growth and monetary policy in 2025.
3. Monetary policy
Throughout 2024, many economists have speculated when the lows for interest rates in the present interest rate cutting cycles will be reached. This question is likely to dominate market influence in 2025. If interest rates remain too high in the major economies of the US, Euro Area and UK, investment activity is likely to be reduced. That could condemn the global economy to another year of slower growth, stifling innovation efforts that would help to reduce domestic inflationary pressures.
In 2025, financial markets will closely monitor China as growth remains slower than expected despite efforts by the Chinese government and the People's Bank of China. The "Japanification" of Chinese bond yields, with the 10-year yield at historical lows by the end of 2024, and a headline CPI inflation rate of just 0.2% Y/Y in November 2024, highlight ongoing issues. Possible threats include: 2025 will mark a fourth year of conflict for Russia and Ukraine. The conflict is likely to remain in the spotlight following the inauguration of Donald Trump on January 20th, given his remarks on the conflict during his Presidential campaign. In the Middle East, the fragile ceasefire between Israel and Hezbollah holds, but, at the time of writing, there is no ceasefire between Israel and Hamas or the Houthi rebels in Yemen. The threat of further military action between Iran and Israel also persists. Tensions are further amplified by instability in Syria following the fall of President Assad’s government. Middle East tensions had a significant impact on the shipping and energy sectors in 2024 by disrupting major shipping routes, causing volatility in oil prices, and increasing maritime security risks. Any intensification of those tensions could lead to higher costs and uncertainties in global trade and energy markets. China and Taiwan’s relationship remains strained, with Chinese President Xi stating in a January 1st address: “no one can stop the historical trend of national reunification.”. While Taiwan seeks better relations with China, this may not be a priority for the Chinese administration given other present challenges. It’s plausible that worsening China/Taiwan diplomatic relations could prompt instability in Europe because of the integration of supply chains between China and major European economies. With energy supplies already pressured because of Russia/Ukraine, any interruptions or price increases of other raw materials, semi-manufactured and manufactured products from China would be unwelcome for Europe, given its current growth challenges. Key elections are being held in Germany and Canada this year. Germany may see the CDU return to power, as the ruling SPD-Greens coalition faces declining support. The AfD (Alternative für Deutschland) has gained significant traction and could become the second-largest party in the Bundestag. In Canada, opinion polls suggest the ruling Liberal Party (LP) is heading for a substantial defeat, with Pierre Poilievre’s Conservatives leading by over 20 percentage points. With Trudeau having resigned at the beginning of January, the Liberal Party are now holding a leadership race, and parliament has been suspended until March 24th. A no confidence vote looks sure to be held once the LP’s leadership contest concludes, which could pave the way to an earlier than expected Spring election. Additionally, there are risks of further political upheaval in France and Spain. France’s minority government struggles to pass a budget, while Spain is dealing with backlash over flooding in Southern Spain. Major economies are expected to approach interest rate reductions cautiously in 2025. The Federal Reserve's latest projections suggest US interest rates will end 2025 at 4%, with a likely adjustment in Q2. The European Central Bank (ECB) is expected to continue its rate cuts, bringing the refinancing rate to 2.4%, while UK rates largely anticipated to drop to 4.25% by year-end. This cautious approach by US and UK central banks is likely due to concerns of potential inflation, which could be influenced by tariffs and trade restrictions from President Trump's administration. The threat of US tariffs (and a more widespread trade war) could mean that the risks on interest rates are that they do not fall as much as predicted in 2025. However, there are several risks from lower inflation also. Global growth concerns, lingering impacts of COVID-19 on investment and demand, and a weakening labour market could lead to a drop in CPI inflation. If deflationary pressures build, global monetary policy may need to stimulate demand and counteract high interest rates. The last prolonged period of goods price deflation preceded the financial crisis and lasted until COVID struck towards the end of the last decade. The euro faced challenges 2024, particularly in the second half of the year, largely driven by a widening interest rate differential, potential tariffs, geopolitical tensions on its border and domestic political instability. Early and decisive action from the ECB could improve the Euro Area’s economic performance. GBP’s resilience against the USD and EUR, at least until the latter end of 2024 was also something of a surprise, especially given the IMF’s projections at the start of the year. Markets will be watching to see if the new Labour government can address the UK’s recent growth stagnation. In the initial stages of 2025, the yield on UK 10 & 30y gilts has risen further, to 15 year and 25 year highs respectively. That, if sustained, will further reduce the UK government’s capacity to meet self-imposed fiscal rules. If consequently the government is required to spend less or tax more, the downside risks to growth and private sector investment are likely to increase. The dollar index reached a 2-year high in December, performing strongly against the euro, Canadian dollar and yen, but a further 3.5% gain is required to test 2022 highs. Market volatility has not been particularly high, with markets behaving relatively orderly in recent moves both up and down. That doesn’t mean that the extent of those moves won’t be large from high to low, and therefore budgeting and executing treasury policies will remain a challenge for many businesses with currency exposure. The IMF’s October 2024 World Economic Outlook, projected 2025 growth of 2.2% for the US, 1.2% for the Euro Area and 1.5% for the UK. Those appear ambitious growth figures for the UK and Euro Area, whereas arguably more optimistic projections were given to Canada and China, at 2.4% and 4.5% respectively. However, misalignment between government and monetary authorities could undermine investment, consumer spending and labour demand. The one upside surprise could come from the Euro Area economy, which might see stronger activity thanks to the ECB’s more aggressive action in loosening monetary policy in the second half of 2024. This might only become obvious in the second half of 2025. Global yields may rise further due to concerns over trade wars and tariffs, potentially causing a short-term boost to consumer price inflation rates. The longer-term risks of a disinflationary or deflationary spiral, prompted by China’s economic challenged, could eventually lead to a decline in government bond yields, surpassing levels seen in the second half of 2024. UK 10y yields are approximately 90 basis points higher than in September 2024 lows. US 10y yields are over a percentage point higher than September lows, and Euro Area 10y yields are approximately 30 basis points higher than December lows. In equities markets, 2025 could prove to be a reality check for investors. In 2024, the S&P grew 23.9%, replicating its 2023 performance, the Euro Stoxx 50 gained 7.9% under half its 2023 gain of 17.4%, and the FTSE 100 gained 5.7%, another disappointing performance after the 3.8% gain in 2023. Markets will be watching to see if M&A will support higher valuations. 
China’s deflation problem – a more global threat?
Global politics
Monetary policy - Where will interest rates settle and when will they get there?
So, what does this mean for the financial markets?
Summary
The possibility that 2025 would bring calm after the storm of elections in 2024 has been dismissed. Significant economic headwinds persist, compounded by central banks’ cautious approach to monetary policy loosening owing to inflation threats. Equally there are deflationary risks that are not receiving sufficient attention.
These economic headwinds could intensify in the first half of 2025, potentially causing significant movements in FX rates beyond 2024 lows or highs, depending on the currency pair.
Governments might be forced into a pivot on fiscal policy, adopting more investment and spending-friendly programmes if growth continues to stagnate. However, if there is no headroom, because of higher borrowing costs or stagnating growth, such action could prove risky for currency rates.
Meanwhile, geopolitical risks are unlikely to fade and could resurface in some countries. Domestic political upheaval is anticipated for upcoming elections and therefore likely to be priced in to some degree, however there could be some surprises along the way, such as snap elections or unexpected resignations.
For businesses, maintaining control over manageable factors will be increasingly important amid these uncertainties.
The second half of 2025 could bring relief for some major economies, potentially prompting a reversal in currency trends. Trading partners might adopt new payment practices or requirements, and managing the potential impact of tariffs on countries switching away from the US dollar will be important.
The introduction of new tariffs could also create opportunities. Businesses in the UK & Europe might come under pressure from US rivals and look to integrate supply chains previously dominated by China, leading to increased M&A activity.
The keys for market and macroeconomic performance for 2025 will be investment, cost control and monetary policy agility. Whichever of the major economies is able to harness these elements most successfully will likely see the best performance in FX, equities and economic growth.
The Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All market data, forecasts and rates are sourced from Yahoo Finance, Bloomberg and Forex Factory.
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