EURUSD: Forecast 2025 for the Most Liquid Currency Pair
Forecasting EURUSD dynamics in 2025 is both a challenge and an opportunity. With the Forex market being one of the most liquid and volatile in the world, accurate predictions are pretty difficult to make but can yield significant profits. Read this article to understand the factors influencing EURUSD and gain deeper insights into the broader financial ecosystem.
Historical EURUSD price drivers
The EURUSD currency pair, also known as the “Fiber”, is the most traded instrument in the global Forex market. This pair is a cornerstone of international finance, symbolizing the economic interplay between two of the world’s largest economies – the European Union and the United States.
Since its first introduction in 1999, the EURUSD exchange rate has served as a barometer for economic health, policy divergence, and geopolitical shifts. It is tightly linked to key factors such as interest rate decisions by the European Central Bank (ECB) and the Federal Reserve (Fed), broader macroeconomic statistics, and global risk sentiment.
Factors influencing the dynamics of the “Fiber” range from macroeconomic data to geopolitical shifts. The most relevant among them are monetary policy divergences between the US and the EU, a phenomenon known as “interest rate differential” (IRD).
Interest rate differential
Between 2003 and 2024, the US and EU central banks followed strikingly similar trajectories in their interest rate policies due to shared global economic trends. In the early 2000s, rates were kept low to encourage growth but were subsequently raised as economies started overheating right until the 2008 financial crisis. This financial catastrophe prompted swift reductions in rates to near-zero levels where they remained for an extended period to foster economic recovery.
In 2020, even deeper rate cuts were in place, reaching record lows, aimed at cushioning economies from the industrial halt caused by the pandemic. However, the surge in inflation during 2022 forced a sharp policy reversal, with the Federal Reserve and the European Central Bank significantly increasing rates to counter rising prices.
By late 2023 and early 2024, inflation had begun to stabilize, prompting a shift in monetary policy. The ECB began cutting rates first and the Fed followed in September 2024.
In general, when the Fed funds rate (FFR) is higher than the ECB fixed interest rate (FIR), the IRD widens, USD gains on EUR, and the currency pair lowers. This happened in the 2014-2019 timespan, as the Fed slowly raised interest rates, while the ECB maintained a zero-rate policy. As a result, EUR suffered quite a blow, losing 24% from April 2014 to May 2015.
The contrary is also true: If the ECB FIR ticks higher than the FFR, EUR is more likely to appreciate, as more investors will seek to place their money into EUR-denominated assets.
Economic data and politics
Despite interest rates being higher in the US, throughout 2017 as well as before the Global Financial Crisis in 2008, EUR gained a lot of ground on USD. This happened because strong economic growth in Europe overshadowed monetary policy inputs. Since 2010, however, the currency pair has been in a global downtrend, marked with sharp but not long-lasting rallies. At first, the Euro suffered quite a blow from the Eurozone Sovereign Debt Crisis (2010–2012), and then it lowered further because of Brexit (2016), which ignited political instability and economic backlash. In 2017–2018, the “Fiber” regained 17.8% as fears of a rising anti-European populism quelled and economic growth resumed. Later, however, the pair began sliding down again.
In 2020, it rallied in the aftermath of the COVID pandemic in hopes of economic recovery, but then it crashed again when geopolitical shifts joined the fray.
Thus, if economic indicators such as GDP growth, inflation, employment, consumer confidence, etc. improve, the currency tied to this economic data strengthens. If the opposite happens, it depreciates. When political instability hits a country, its currency inevitably loses value. The opposite is also true for each sovereign country.
Geopolitics
A strong impact on currencies is historically provided by geopolitical unrest. During periods of heightened risk aversion, USD generally benefits from its status as the world’s primary reserve currency. Conversely, in risk-on environments, the euro is usually appreciated as investors seek higher yields in European assets.
With the beginning of the Russo-Ukrainian conflict in February 2022, EUR devalued very quickly because the European economy is a major energy consumer, and Russia was one of its top suppliers of natural gas, providing cheap energy to the EU’s industrial sector. Furthermore, geopolitical tensions fueled strength in USD, driving it to a 20-year high.
After that, EURUSD bounced back, offsetting some of its earlier losses, and it has been drifting in a large consolidation channel ever since.
Analysis of EURUSD 2024 dynamics
In 2024, EURUSD experienced relatively stable trading within a narrow range of 1.12000–1.06000, reflecting the complex interplay of monetary policies, broader economic trends, and geopolitical factors.
At the beginning of the year, the euro weakened as investor expectations aligned with predictions of an early interest rate cut by the ECB. That happened in June when the ECB reduced rates by 25 basis points to 4.25%.
In the meantime, the Fed delayed its monetary easing until September, when it delivered an outsized rate cut from 5.50% to 5.00%. These differing timelines for policy adjustments influenced the pair’s dynamics throughout the year.
EUR’s performance was further constrained by the eurozone’s economic stagnation, which began with sanctions imposed on Russia in 2022 and barred the eurozone from cheap fuel, thus increasing industrial production costs. The slowdown continued in 2024 when GDP growth remained below 0.5% per quarter.
Weak business activity in major economies like Germany and France exacerbated concerns about a potential recession. For example, Germany’s manufacturing and services HCOB PMIs fell sharply signaling economic vulnerability, particularly in its automotive sector.
At the end of November, the German automotive industry continued its path into the abyss, with major companies making announcements that they were planning to move production to other countries and posting sharp decreases in profits (for example, Audi recorded a -91% decrease in earnings, BMW -84%, Volkswagen -64%, Mercedes-Benz -54% y/y). In addition to that, unemployment throughout the country continued rising, with colossus companies like ThyssenKrupp firing more than 11,000 employees and shutting down its Kreuzal-Eichen facility (with plans to close more next year).
France faced similar challenges with its services sector, which had seen a temporary boost from the Paris Olympics, suffering a steep decline thereafter.
Despite this, inflation in the eurozone moderated, declining from an annual rate of 2.8% in January to 2.3% in November after falling below the 2% ECB threshold in September. This provided the ECB with room to adopt a more accommodative stance, which supported moderate gains for the euro in the second half of the year. However, by September, renewed economic concerns in Europe, coupled with weak PMI data, caused a drop in the euro to 1.10000. Additionally, the ECB implemented the second rate cut, further influencing investor sentiment.
In contrast, the US maintained higher interest rates, widening the IRD gap for the dollar and strengthening its appeal, particularly during periods of geopolitical instability. Military conflicts, such as those in the Middle East, drove demand for safe-haven assets, also favoring the dollar over the euro.
The last major hit to the EUR was provided by the US election. As the Republican candidate Donald Trump is to take office in January, he promised tough tariff hikes will be implemented during his term, hitting an already weakened EU’s export industry. At the same time, his policies are expected to be heavily pro-inflationary, which will likely keep the Fed from lowering rates as fast as expected, contributing to the IRD’s expansion in favor of the “Greenback”. This caused the EURUSD to slide to its yearly low, around 1.03660.
What is going to happen to EURUSD in 2025
The new year promises to be pretty interesting for EURUSD, as the fate of the currency will be tied to major shifts in US foreign and internal policy, geopolitical events, and the dynamics of economic conditions both in the EU and in the US.
Based on all that was said in the analysis above, Headway experts forecast three different scenarios for EURUSD in 2025.
1. Russo-Ukrainian war ends, European economy recovers, Trump’s trade war doesn’t disrupt global trade
As has already been said in the two previous articles of this series (XAUUSD and XBRUSD forecast for 2025), we do not believe that a peaceful ending to the ongoing conflicts is the most probable scenario.
In any case, there is still a remote possibility that when Trump takes office, there will be some effort to cool the mounting escalation. In this case, it will all depend on the EU’s and Russia’s willingness to heal their business relationship. In case the two blocks were to negotiate a deal, it would likely mean cheap fuel flows into Europe again.
Cheap fuel would contribute to the EU’s industry rehabilitation after years of tough economic conditions, boosting economic growth and the revival of the European economy. At the same time, Trump’s tariff hikes wouldn’t cause much trouble, but will likely contribute to strengthening the dollar nevertheless.
Should all of the above happen, the EURUSD could rally to the upside, possibly reaching its 2024 highs and even its pre-war levels. The expected exchange rate in this far too optimistic scenario will be between 1.1200–1.1500
2. Armed conflicts freeze, but Trump’s trade war brings the European economy to heel. A Hawkish Fed bolsters the USD even more.
If Trump still manages to quell the flames of war but not extinguish them completely, there will be neither room nor will for the European Union to negotiate LNG deals with Russia.
Furthermore, a trade war escalation between the US and major countries exporting into the US will likely cause USD to appreciate strongly, and EUR to devaluate to offset some of the losses caused by tariff hikes. A similar reaction happened to USDCNY after Trump began imposing trade restrictions on China in January 2018.
Considering Trump’s threats of imposing 100% tariffs on BRICS nations if they do not abandon their quest to create a new reserve currency and replace USD, a fast strengthening of the US dollar under his term becomes a dangerous reality. A stronger US economy sustained by increased government backing of local industrial production and coupled with a weaker European economy will be a decisive bearish factor for the “Fiber”.
After negative PMI numbers, EURUSD reached its yearly low on November 20, 2024. If this trend persists next year, the ECB will probably have to quickly lower rates to near-zero levels again, in an attempt to support its contracting manufacturing and industrial sectors.
This is likely to happen while the Fed maintains a more hawkish stance, caused by Trump’s pro-inflationary policies. The worst scenario will bring an overpriced dollar into being, destabilizing foreign exchange as foreign investors could now find USD assets too expensive to put their money in.
In this scenario, the expected EURUSD value would likely range between 1.0000–0.9500.
Recession in the US brings the EU into further stagnation, wars do not allow a negotiation process
The US economy faces deep structural challenges. Heavy reliance on borrowing has pushed debt-to-GDP ratios beyond World War II levels, highlighting vulnerabilities. Job creation lags in key sectors like manufacturing and professional services, signaling recession risks.
Despite starting monetary easing in September to address labor market issues, inflation appears to be resurgent. That will likely worsen under Trump’s term, as his politics will likely bolster inflation growth. Fed Chair Jerome Powell hinted on November 14, 2024, that further rate cuts might not be needed, but rising bond yields reflect market doubts and fears of persistent inflation.
Adding to recession concerns, Berkshire Hathaway’s cash reserves have reached a record $325 billion, 28% of its asset value – the highest since 1990. Warren Buffett’s decision to hold such liquidity suggests preparation for major opportunities or a looming downturn.
In case a recession strikes the US economy, the USD could depreciate strongly, but the EUR also won’t be left alone. On average, the EURUSD reacted with a -15% to -20% drop in times of heightened economic instability. If a gloomy scenario like this one were to manifest, EURUSD could head for its 2001–2002 all-time lows, depicting a 0.9500–0.8500 range as the most probable one. However, a sharp rebound from this fall is also likely, as historically after a swift fall, the “Fiber” recovered pretty strongly.
Conclusion: EURUSD in 2025
Based on the analysis of historical and 2024 dynamics, the most likely outcome for EURUSD in 2025 involves continued challenges for the Euro due to structural economic issues in the European Union and the potential escalation of US trade policies under the Trump administration.
The most probable scenario is that the US dollar will maintain its strength due to high interest rate differentials and robust domestic policies favoring local industries. Meanwhile, the euro is likely to face pressure from structural vulnerabilities, including a struggling manufacturing sector and limited ability to recover without significant policy shifts or external support, such as cheap energy. As a result, EURUSD could move closer to parity, trading in a range of 1.0000 to 0.9500 for much of the year.
Therefore, traders and investors should prepare for heightened volatility, with key attention on interest rate policies and macroeconomic developments shaping the currency pair’s direction in 2025.
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