The DXY Index started 2025 on a strong note, appreciating by 0.7% to 109.27 overnight, its highest level since November 2022. The DXY must rise sustainably above 110.20 to push towards the 114.78 high seen in September 2022. We expect the greenback to strengthen in the first half of 2025 from US President-elect Donald Trump’s pledge to impose tariffs at the outset of his second presidential term. Last month, the Fed projected two rate cuts in 2025, fewer than the four reductions projected in September. The Fed is vigilant about inflation risks from potential tit-for-tat tariff wars between the US and many countries. The US economy is expected to outperform its Developed Market peers in 2025.
The US federal debt ceiling was reinstated on January 2 which US Treasury Secretary Janet Yellen estimated would be reached around January 14-23. However, this will unlikely endanger the USD. The Bipartisan Policy Center estimated that the Treasury’s cash and extraordinary will avert a default for several months beyond the first quarter. Meanwhile, Trump demanded that GOP lawmakers address the limit before he assumes office on January 20, 2025. 
EUR/USD is set to depreciate to parity after depreciating to 1.0265 overnight from 1.0426 last Friday. The OIS market is aggressively betting on the European Central Bank to lower the deposit facility rate below 2% in 2025 after 100 bps of cuts to 3% in 2024. Political uncertainties and economic weaknesses in Germany and France are weighing on the EU economy. No single party is expected to win Germany’s elections on February 23 amid doubts that the next coalition government would be stable enough to last a full four-year term. France is facing challenges in forming and maintaining a stable government after the 2024 snap elections led to a fragmented parliament. Trump has threatened to impose tariffs on the EU unless the bloc significantly scales up its American oil and gas purchases. Due to Trump’s tariffs, EU is also concerned about the potential diversion of exports from China and other countries into its markets.
GBP is weak after breaking below 1.25. GBP/USD fell by 1.2% to 1.2365, near its 1.23 low in April 2024. Breaking this level could send the currency pair towards the 1.2037 floor in October 2023. Speculators have been paring their long GBP positions since October, per the CFTC data. Apart from the Trump Trade boosting the USD, the UK’s economic outlook weakened due to UK Chancellor Rachel Reeve’s tax increases in the October Budget and the fragile Eurozone economy. The UK’s entry into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) last month will not offset the negative impact from Trump’s potential universal tariffs on US imports. Finally, we expect the Bank of England to lower rates by 100 bps in 2025, at double its pace in 2024, and the Fed’s projected 50 bps cuts for 2025.
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