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As expected, April 2025 proved to be a volatile month for the forex markets, largely dominated by the weakening US dollar. The decline was fuelled by growing concerns about the US economic outlook under President Trump’s policies, particularly his aggressive tariff implementations, and increasing doubts regarding the Federal Reserve’s independence.
The euro benefited from the dollar’s weakness, although potential trade risks capped its gains. The British pound saw significant strength. The Japanese yen continued to attract safe-haven flows amidst global economic uncertainty and rising expectations of further policy normalization by the Bank of Japan (BOJ).
Here’s what to watch in May:
- US Economic Data and Policy Uncertainty: Markets will closely monitor upcoming US economic data releases for signs of a slowdown resulting from the tariffs. Any further erratic policy announcements from the Trump administration will likely exacerbate dollar volatility.
- Federal Reserve Stance: Despite Trump’s calls for lower rates, the Fed’s rhetoric will be crucial. Any indication of the Fed yielding to political pressure could further erode confidence in the dollar.
- Bank of England Rate Decision: The BoE’s monetary policy decision on May 8 is highly anticipated, with markets pricing in a rate cut following the recent drop in inflation.
- Eurozone Economic Outlook: The resilience of the Eurozone economy in the face of US tariffs will be a key factor influencing the euro’s performance.
- Geopolitical Developments: Ongoing trade tensions and other global uncertainties will likely continue to fuel safe-haven demand, benefiting the yen and other assets like gold.
US Dollar (USD)
The US dollar experienced a notable sell-off in April, driven by investor concerns over President Trump’s trade policies and their potential impact on the US economy. The unexpected weakness of the dollar, even as tariffs were implemented, has raised questions about its traditional safe-haven status and overall confidence in the US economic management.
Trump’s public criticism, attacks on Fed Chair Powell, and apparent attempts to influence the Federal Reserve’s monetary policy have further unnerved investors. The significant tariff announcements made in early April are now being assessed for their broader economic consequences.
Analysts suggest that the dollar’s weakness reflects a growing unease about the long-term implications of the current US policy direction. The lack of a strengthening dollar in the face of tariffs, a historically unusual reaction, indicates a potential shift in investor sentiment, which could continue into May.
Key Levels:
- EURUSD: Higher – 1.1760, Lower – 1.1200
- GBPUSD: Higher – 1.3650, Lower – 1.3200
- USDJPY: Higher – 146.60, Lower – 138.10
Euro (EUR)
Of course, the euro benefited from the broad weakness of the US dollar in April. While the US tariffs on European goods present a downside risk, the relative stability of the Eurozone economy compared to the uncertainty surrounding the US provided some support.
Germany’s recent fiscal adjustments aimed at boosting defense spending have also been viewed positively. However, the potential for escalating trade tensions remains a significant headwind for the euro. The European Central Bank’s (ECB) recent rate cut and cautious outlook on Eurozone growth suggest limited upside for the EURUSD in the near term.
However, some analysts believe the long-term fair value of the EUR/USD pair is considerably higher, suggesting potential for future gains if dollar confidence remains weak.
Key Levels:
- EURUSD: Higher – 1.1760, Lower – 1.1200
- EURGBP: Higher – 0.87400, Lower – 0.8460
British Pound (GBP)
The British pound also showed significant strength against the USD in April, again as investors trade against the uncertainty in the US economy. Softer-than-expected UK inflation data increased market expectations for a BoE interest rate cut at its May meeting.
While the UK economy still faces its own challenges, the US assigned the UK only its baseline tariff of 10%. That, alongside the struggling US dollar, has strengthened the GBP. However, the long-term outlook for the pound remains somewhat cautious, contingent on the extent of future BoE rate cuts and the overall health of the UK economy.
Analysts note that while the pound has gained recently, the anticipated rate cut in May could temper further appreciation. The performance of the EUR/GBP (which has risen amid the volatility) will also be closely watched.
Key Levels:
- EURGBP: Higher – 0.87400, Lower – 0.8460
- GBPUSD: Higher – 1.3650, Lower – 1.3200
Japanese Yen (JPY)
The Japanese yen continued to attract safe-haven flows in April, amid global economic and political uncertainties, primarily those stemming from US trade policies. Furthermore, growing market expectations that the Bank of Japan (BOJ) will proceed with further interest rate hikes in 2025 have provided additional support to the yen.
Despite some intraday pullbacks, the overall trend suggests continued strength for the yen, especially against the weakening US dollar. The cautious stance of the BOJ regarding the potential impact of US tariffs on the Japanese economy suggests a measured approach to policy normalisation, but the underlying expectation of higher rates remains a key driver for yen strength.
Technically, the USD/JPY pair remains in a downtrend, and any rebounds are likely to be viewed as selling opportunities as long as dollar weakness persists and BOJ rate hike expectations remain intact.
Key Levels:
- USDJPY: Higher – 146.60, Lower – 138.10
- EURJPY: Higher – 164.15, Lower – 157.00
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