Into the Danger Zone
This summer is shaping up to be anything but quiet. Key deadlines loom, with the pause periods on President Donald Trump’s reciprocal tariffs ending on July 9 for many nations and August 13 for China. Additionally, the self-imposed deadline to pass Trump’s “Big Beautiful Bill” through Congress is set for July 4. According to our FX Volatility Monitor, G10 FX implied volatility remains modest compared to its post-“Liberation Day” spike. Notably, 1M USD/NOK volatility appears to offer a cost-effective hedge against this summer’s potential market turbulence. Adding to the tension is Israel’s recent strike on Iran’s nuclear facilities. Rising oil prices present a positive terms-of-trade shock for the USD but may negatively impact the JPY, CHF, and EUR, potentially limiting further downside for the USD against these currencies.
The G7 meeting, scheduled for June 15-17, with invitations extended to Australia, Brazil, India, Indonesia, Mexico, South Korea, South Africa, and Ukraine, could serve as fertile ground for significant trade deal announcements. Furthermore, six G10 central bank meetings are set to take place next week, adding to the eventful calendar.
The Federal Reserve is expected to maintain its current policy stance, though updated forecasts may underscore the tension between persistent inflation and a subdued U.S. growth outlook. Should the Fed continue prioritising inflation, its updated dot plot might signal a shallower monetary policy easing cycle This could enhance the USD’s rate appeal, but a more substantial de-escalation of global trade tensions would be needed for the currency to stage a meaningful recovery. Meanwhile, the GBP is trading at a discount relative to its rate advantage over the EUR. A steady decision by the Bank of England (BoE) could help the pound regain stability.
The Bank of Japan (BoJ) is likely to hold its policy steady but may reduce the pace of its asset purchase tapering following a recent spike in super-long-end Japanese government bond yields. The Riksbank’s upcoming decision carries significant uncertainty, with potential rate cuts countering its March projection of stable rates for the foreseeable future. With Swiss inflation returning to negative territory, the Swiss National Bank (SNB) appears poised to cut its policy rate back to 0%. The Norges Bank, however, is unlikely to initiate its first rate cut until the second half of 2025. In China, cyclical data will give early indications about the impact of Trump’s tariffs, while U.S. retail sales figures will offer further clues. In the UK, retail sales and inflation data, alongside the BoE’s decisions, will shape market expectations for additional rate cuts.
FX and Gold Outlook
EUR Outlook
The euro (EUR) has recently gained support, driven by market expectations that it could become a key beneficiary of diversification away from the US dollar (USD). Additionally, hopes for aggressive fiscal stimulus bolstering the Eurozone’s economic prospects and attracting capital inflows have further strengthened the EUR. As a result, EUR/USD could remain supported through the rest of this year and into early 2026. However, much of the optimism appears to be priced in, potentially limiting further gains. Upside risks to the EUR forecast include earlier-than-expected economic revitalization from fiscal stimulus and a resolution to the Ukraine conflict, which could lead to improved commodity terms-of-trade for the Eurozone.
USD Outlook
The USD is expected to remain subdued in 2025, driven by concerns over the impact of previous US administration policies, which could prompt portfolio rebalancing away from the US and increased short-USD hedging. Additionally, uncertainty around fiscal stimulus approval in Congress, following the US sovereign downgrade and debt ceiling debates, poses risks. While a USD collapse is unlikely, the negative effects of past policies are expected to be temporary. The US economy could begin recovering in the second half of 2025, with a rebound in 2026 as fiscal stimulus gains traction. This recovery may allow the Federal Reserve to avoid aggressive rate cuts, especially if inflation remains persistent, supporting a USD rebound within 6 to 12 months.
CHF Outlook
The Swiss franc (CHF) has strengthened as a safe-haven currency, even against the resurgent EUR. However, EUR/CHF could trend higher over the year as Switzerland’s return to zero interest rate policy (ZIRP) makes the CHF an attractive funding currency. Lower inflation differentials and balanced growth may help stabilize CHF valuations, avoiding significant nominal losses.
JPY Outlook
The Japanese yen (JPY) remains a strong hedge against potential stagflation in the US. Asset managers are likely to continue diversifying away from US and Japanese assets, benefiting the JPY. However, USD/JPY could face downward pressure due to the Federal Reserve cutting rates and the Bank of Japan (BoJ) potentially hiking rates, though the latter is not expected until 2026.
GBP Outlook
The British pound (GBP) is forecasted to outperform both the EUR and USD in 2025 and beyond, partly due to the UK economy benefiting from reduced trade tensions with the US and EU. Persistent UK inflation could delay aggressive rate cuts from the Bank of England (BoE), maintaining the GBP’s rate advantage over the EUR. The UK government’s fiscal conservatism may further support the GBP, especially amid a global bond market sell-off. Additionally, the GBP’s undervaluation relative to the EUR, as indicated by short-term FX fair value models, suggests room for appreciation.
CAD Outlook
USD/CAD has returned to levels near 1.36, largely due to broad USD selling. This movement exceeds what relative interest rates would suggest. A potential trade agreement between the US and Canada could serve as a catalyst for a pullback in the pair.
AUD Outlook
Concerns over US tariffs and a global trade war have peaked, with the focus narrowing to US-China tensions. While less damaging than a global trade war, this scenario is less favorable for the Australian dollar (AUD). Nonetheless, China’s economic stimulus measures and diversification away from US assets should benefit the AUD, which remains closely tied to the Chinese yuan (CNY). Australia’s labor market remains tight, supporting inflation and offsetting aggressive rate cut expectations. Post-election government spending could further bolster the AUD.
NZD Outlook
New Zealand’s economy is recovering strongly from a deep recession, supported by robust agricultural export prices and production. While the lack of US trade deals could weigh on the New Zealand dollar (NZD), diversification away from US assets and positive Asia-US equity market performance should support NZD/USD.
Gold Outlook
Gold’s recent sharp gains may deter buyers in the short term, but its strength could resume in the next three to six months, driven by central bank purchases and the Federal Reserve’s easing cycle, which could lower US real rates and the USD. A renewed US economic rebound, accompanied by higher interest rates and Treasury yields, would likely challenge gold’s strength in 202
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!