USD forecast - third party data round up

Intro

USD is the abbreviation for the US dollar or United States dollar, the official currency of the United States, the world’s most widespread and popular currency. The USD is the world’s reserve currency and the most traded currency on the foreign exchange market.

The value of the USD is measured against the value of other currencies, creating the exchange rate. For example, EUR/USD measures the euro against the US dollar.

The ICE US Dollar Index (DXY) – a measure of the currency’s strength against a basket of rival currencies including the euro (EUR), Japanese yen (JPY) and British pound (GBP) – stands at the 107 mark as of January 2025, having risen around 7% from its 2024 low of 99.80 in September. 

The U.S. Federal Reserve (Fed) implemented a series of interest rate hikes totalling 425 basis points (bps) in 2022, raising the federal funds rate from 0.25% in March to 4.50% in December. In 2023, the Fed continued with 25 bps increases in February, March, May, and July, bringing the rate to a range of 5.25%–5.50% by July 27, 2023. The Fed maintained this rate through September 2024, when it lowered rates by 50 bps. In December 2024, the Fed cut rates an extra 25 bps, lowering the rate to the 4.25%–4.50% range. 

The Fed's aggressive rate hikes in 2022 and 2023 contributed to the U.S. dollar's strength during that period. However, the subsequent rate cut in September and December 2024, along with easing inflation rates and concerns over a potential U.S. recession, have moderated the dollar's appreciation, keeping it below its previous highs.

U.S. Dollar forecast for 2025 and beyond

As of early 2025, the U.S. Dollar Index (DXY), which measures the dollar's strength against a basket of major currencies, has exhibited notable resilience. Starting the year at approximately 108.40 points, the DXY has faced some downward pressure as fears emerged about the US competitiveness in the AI space after the emergence of DeepSeek, a Chinese disruptor. However, the outlook remains positive in 2025 as the dollar continues to have a competitive advantage given the strength of the US economy and the Federal Reserve’s continued restrictive monetary policy. 

J.P. Morgan predicts that the U.S. economy will grow by 2.7% in 2025, outpacing the 1.7% growth forecast for other developed markets. This robust growth, driven by superior productivity and higher business investment, supports a stronger dollar. Furthermore, the increasing divergence in global growth has led to a greater disparity in central bank policies. As of February 2025, the Federal Reserve is expected to cut rates only by 45bps in the year, compared to 88bps by the ECB and 84bps by the BOE. The Federal Reserve is already lagging behind other central banks in this cutting cycle as inflation has proven to be more stubborn than originally thought, all whilst growth has held up remarkably well. This widening differential plays in favour of the US dollar.

In the meantime, political developments will also be key in 2025 as Donald Trump resumes his time in office. The Financial Times thinks this could initially bolster the USD due to anticipated fiscal stimulus and tax policies. However, factors such as rising fiscal deficits, high tariffs, and unpredictable foreign policies may lead to a subsequent weakening of the dollar during his term.

Elsewhere, ING projects that the USD will maintain its strength through 2025, supported by the Federal Reserve's measured approach to rate adjustments, robust economic growth, and global trade developments. However, persistent inflation and geopolitical uncertainties could introduce volatility into currency markets.

Looking ahead, USD's trajectory in 2026 and 2027 will be shaped by a combination of monetary policy adjustments, economic growth patterns, and fiscal developments. Fiscal policies, particularly those resulting from political developments, are expected to impact the USD. For instance, certain policy scenarios could lead to higher fiscal deficits, potentially exerting upward pressure on bond yields. ING anticipates that the 10-year U.S. Treasury yield could reach 5% by 2026, reflecting concerns over fiscal sustainability and its implications for the USD.

EUR/USD forecast: Will USD strengthen against the euro? 

As of February 2025, the EUR/USD exchange rate is hovering around 1.04. Recent trade policies, economic growth differentials, and monetary policy stances have favoured the US dollar in recent months, causing the pair to devaluate over 6% in 2024. 

The current political and economic landscape is volatile, which means the outlook of the FX market can change rapidly. Central banks will remain at the core of rate differentials in currency markets. Analyst Chris Turner at ING was bearish toward the dollar in a EUR/USD forecast:

The bearish sentiment on the euro is widely agreed on. A report from Standard Chartered released in January also indicates a potential for further weakening of the Euro against the US dollar. This outlook is influenced by the European Central Bank's (ECB) recent monetary policy actions. ECB President Christine Lagarde announced the fifth consecutive cut to the key deposit rate, emphasizing that rates remain restrictive and that the disinflation process is progressing as planned. Consequently, money markets are now anticipating three additional 25 basis point rate cuts within the year. They predict the pair could drop to 1.018 in 2025. 

Meanwhile, J.P. Morgan predicts a dynamic year for the pair. In the first quarter of 2025, EUR/USD is anticipated to test parity, reaching approximately 0.99 by the end of March. This expected decline is attributed to the market fully pricing in tariff risks and the prevailing strength of the U.S. dollar. Following the initial dip, a recovery is projected, with the EUR/USD exchange rate rebounding to around 1.08 by year-end. This resurgence is expected to stem from potential mitigating factors and a deceleration in U.S. economic momentum.

Past performance is not a reliable indicator of future results. 

GBP/USD forecast: Is the USD expected to rise against the GBP? 

In 2024 and early 2025, the British pound (GBP) experienced fluctuations against the U.S. dollar (USD). In September 2024, the GBP/USD exchange rate rose to 1.34. By January, it had declined to around 1.21.

In December 2024, the Bank of England's Monetary Policy Committee (MPC) voted by a majority of 6–3 to maintain the Bank Rate at 4.75%. Three members preferred a 0.25 percentage point reduction to 4.5%.

As of early February 2025, the Bank of England is anticipated to cut its benchmark rate to 4.5% from 4.75%. Economists expect this decision to be announced on February 6, 2025, alongside updated economic growth and inflation forecasts.

The Office for Budget Responsibility (OBR) has highlighted challenges such as low economic growth and higher borrowing costs, which have eliminated the government's available fiscal headroom of £9.9 billion. A recent surge in borrowing costs as a result of rising yields suggests that Chancellor Rachel Reeves may need to consider spending cuts or tax increases to adhere to fiscal rules.

In summary, the UK economy faces ongoing challenges, including currency fluctuations, fiscal constraints, and monetary policy adjustments, as it navigates through 2024 and into 2025.

Past performance is not a reliable indicator of future results. 

What is the future dollar value prediction against the British pound?

Analysts at JP Morgan predict GBP/USD to experience fluctuations throughout 2025. The bank anticipates a decline to 1.21 in the first quarter, followed by a recovery to 1.32 by December. This outlook reflects expectations of U.S. dollar strength in the early part of the year, driven by factors such as robust U.S. economic performance, higher interest rates, increased productivity, and a widening innovation gap. In the latter part of the year, the pound is expected to regain strength as mitigating factors, including potential tariff reductions and a resolution of geopolitical tensions, come into play. Analysts at City Index, also forecast the pair to experience further downside pressure in the short-term as the Bank of England is likely to cut rates more rapidly than the Federal Reserve. 

“Technically, GBP/USD has encountered resistance around 1.3425 and has broken below key support levels, including the 200-day Simple Moving Average (SMA) and a rising trendline from September 2022. If the pair falls below the 1.25 support level, it may target 1.23, and a further decline could bring 1.20 into focus. On the upside, a move above 1.28 could expose the 200 SMA and the psychological level of 1.30, with a rise above 1.34 potentially creating a higher high”.” 

As of February 6, 2025, the Bank of England (BoE) has implemented its third consecutive 0.25% interest rate cut within six months, bringing the base rate down to 4.5%. Data from Reuters suggests market analysts anticipate that the BoE will continue this trend, with expectations of two additional 0.25% cuts over the course of 2025, potentially reducing the base rate to 4% by year's end.

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What drives the U.S. Dollar? 

Several key factors influence the value of the USD against other currencies, such as monetary policy decisions made by the Federal Reserve, which depend on the macroeconomic backdrop and data. Political events, as well as geopolitical events, can also influence the US dollar. The global status of the USD is mainly driven by the strength of the US economy and changes in its value therefore having implications for the global economy. 

1. Interest Rates & Federal Reserve Policy

The U.S. Federal Reserve (Fed) sets interest rates, influencing the dollar’s value. Higher interest rates attract foreign capital, strengthening the USD whilst lower interest rates make the dollar less attractive, leading to depreciation. Fed policies like quantitative easing (QE) weaken the dollar, while quantitative tightening (QT) strengthens it.

2. Inflation & Economic Growth

High inflation reduces the dollar’s purchasing power but may lead to rate hikes, which can support the currency. Strong GDP growth makes the U.S. economy more attractive to investors, boosting the dollar.

3. Safe-Haven Demand & Market Sentiment

The USD is a safe-haven currency, meaning it gains strength during global uncertainty, whether from economic underperformance or geopolitical conflicts. When risk appetite is high, investors shift to higher-yield assets, sometimes weakening the dollar.

4. Trade Balance & Current Account Deficit

A trade deficit (importing more than exporting) can weaken the dollar over time as it sells its own currency to buy the foreign currency needed to buy foreign goods. This increases the supply of the domestic currency in the forex market, potentially lowering its value. Conversely, a trade surplus (exporting more) strengthens the USD.The fact that oil is traded in US dollars tends to support long-term demand.

5. U.S. Treasury Yields & Bond Market

Higher U.S. Treasury yields attract foreign investment, strengthening the USD.If investors anticipate lower yields then the dollar may weaken.

6. Global Demand for USD & Reserve Currency Status

The USD is the world’s primary reserve currency, meaning central banks hold large reserves of it. High demand for U.S. dollars in global trade and finance keeps it strong.

7. Political & Geopolitical Factors

Political stability in the U.S. supports the dollar’s safe-haven status. Global events (e.g., wars, trade disputes, or sanctions) can drive demand for the USD.

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Historical U.S. Dollar Performance

Over the past 20 years, the US Dollar Index has traded across a wide range, from 120.00 to a low of 71.00. The index started in the year 2000 at 101.60 before rising to 121.00 in August 2001. The DXY then fell over the next few years, reaching a low of 71.00 in the financial crisis of 2008.

Since then, the USD has been steadily climbing higher to 103.80 in March 2020 as Covid hit, driving safe-haven flows. From there, the price eased back slightly to 95.70, where it was trading at the start of 2022.

In 2022, the DXY reached a high of 114, influenced by the Federal Reserve's interest rate hikes and global uncertainties such as the Russian invasion of Ukraine. By July 2023, the index had dropped below 100, as the Federal Reserve held rates steady amid reduced inflation and low unemployment.

In summer 2024, the DXY experienced a significant selloff, dropping over 5% as markets got spooked by a large unexpected rise in the unemployment rate - triggering the Sahm rule- which led to expectations of Federal Reserve interest rate cuts. The subsequent rebound to 109.80 in January 2025 reflects ongoing market volatility and shifting economic conditions as Donald Trump plans to introduce global tariffs and the Federal Reserve keeps rates steady for longer. 

Past performance is not a reliable indicator of future results. 

US Dollar Trading Strategies to consider

Before entering your first forex trade, having a well-defined forex trading strategy is crucial. A strategic approach not only helps streamline your decision-making process but also minimizes the impact of emotional biases. 

Experienced forex traders often blend technical analysis and fundamental analysis to guide their trading decisions. Below, we outline key forex trading strategies to help you choose the one that aligns best with your trading goals and risk tolerance.

Day Trading: Seizing Opportunities in Intraday Movements

Day trading involves entering and exiting positions within the same trading day. By leveraging technical analysis tools, such as price trends and chart patterns, day traders identify optimal entry and exit points.

• Key Tip: Focus on high-liquidity currency pairs and use stop-loss orders to mitigate risk in volatile conditions.

Swing Trading: Capturing Multi-Day Price Movements

Swing trading aims to capture price swings over days or weeks. Traders rely heavily on technical indicators like moving averages, oscillators, and Fibonacci retracements to identify potential turning points in currency prices.

• Strategy: Swing traders often take a position near market tops or bottoms, speculating on a reversal or continuation of a trend.

• Who It's For: This approach suits traders who prefer a less time-intensive strategy than day trading but are still active in the market.

Position Trading: Long-Term Profit Potential

Position trading is ideal for those with a focus on fundamental analysis, including economic trends, central bank policies, and geopolitical events. This strategy involves holding positions for extended periods such as months or even years to capitalize on macroeconomic factors driving currency prices.

• Example: A position trader might take a long position on a currency expected to appreciate due to sustained economic growth or favorable interest rate policies.

• Considerations: Patience and a long-term perspective are essential, as short-term fluctuations are largely ignored.

Trend Trading: Riding the Wave of Market Momentum

Trend trading leverages historical price data and trend indicators to align trades with prevailing market momentum. This strategy works across short, medium, and long-term timeframes.

• Tools: Oscillators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) help identify potential entry and exit points.

• Best Practices: Avoid countertrend trades unless supported by strong technical signals or fundamental catalysts.

Balancing risk and reward in trading the US Dollar

To succeed in forex trading, it's important to manage the balance between risks and rewards effectively. Here are some key practices:

• Education: Gain a thorough understanding of forex markets, technical analysis, and fundamental analysis.

• Risk Management: Use tools like stop-loss orders, position sizing, and risk-reward ratios to protect your capital.

• Discipline: Stick to a trading plan and avoid emotional decision-making.

• Diversification: Avoid putting all your capital into a single trade or currency pair.

• Regulation: Choose a regulated broker to ensure security and transparency.

Experienced forex trading requires preparation, strategy, and the ability to manage risks effectively. Understanding both the rewards and risks will enable you to navigate the market with greater confidence.

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