Global financial markets are preparing for an important year, 2025. Changes in currency markets and commodity prices will bring both challenges and opportunities for investors, traders, and market analysts. This detailed guide looks at five major themes that will shape the markets in 2025, providing useful insights to help you plan and make smart choices.
Emerging market currencies in 2025
Emerging markets have become increasingly popular for traders and investors, and emerging market currencies play a significant role in the global foreign exchange markets. This article examines the outlook for emerging market currencies in the first quarter of 2025.
Profit and risk dynamics
Currency traders always have to balance profit versus risk, and emerging markets have become attractive for investors with a high tolerance for risk. Trading in emerging market currencies offers the opportunity of higher returns than in developed markets, but the risk is higher than in more traditional markets. Emerging market currencies often experience sharp fluctuations, and traders and investors need to be prepared for sudden shifts in which the currency can drop sharply.
As a case in point, at the December 2024 policy meeting, the Federal Reserve surprised the market when it lowered its rate cut projection for 2025. The Fed said that it planned to cut rates just twice next year, down from four times in the September 2024 forecast. The US dollar posted sharp gains in reaction to the Fed forecast, and emerging currencies fell sharply. The Indian rupee and Brazilian real dropped to record lows, while the Indonesian rupiah dropped to a four-month low.
Will Q1 spell trouble for EM currencies?
The Fed’s plan to slow the pace of rate cuts in 2025 means that it might not cut at all in the first quarter, which would be bullish for the US dollar. In the words of one analyst, “the US dollar is king right now”, and that could spell trouble for emerging currencies in early 2025.
In addition to the Fed’s hawkishness in its rate plans, emerging markets also have to contend with the expected policies of the incoming Trump administration in January 2025. Trump has pledged new tariffs on US trading partners, which would hurt the export sectors of emerging market economies and likely send emerging market currencies lower against the US dollar.
Also, Trump has promised to cut taxes and further deregulation, which would boost US growth and likely boost the US dollar. If the Trump administration quickly enacts a protectionist trade policy, emerging markets could see a decline in exports, which would weaken their currencies.
Can emerging markets compete with the rising US stock market?
As we mentioned earlier, emerging currencies tend to show significant volatility, which presents the opportunity for profit but also carries a high degree of risk. In 2024, the US stock markets performed very well – the S&P 500 soared 25% and the Dow Jones climbed 14%. These handsome profits involved much less risk for investors than emerging market currencies, which could mean that investors will choose to park their funds in the US stock market rather than in risky emerging market currencies.
An important point to keep in mind is that in 2024, most of the major emerging market currencies lost value against the US dollar. This raises the interesting possibility that traders and investors of emerging market currencies might employ a strategy of shorting these currencies against the US dollar, which means that the trader would profit if the emerging market currency fell against the US dollar. Short selling is, however, a risky strategy, particularly in the case of emerging market currencies.
As we move into 2025, the outlook for emerging markets is not encouraging. The US dollar has looked very sharp in recent months, and the strong US economy shows no signs of slowing down. With the incoming Trump administration promising to slap tariffs on US trading partners and emerging market currencies struggling against the strong US dollar, emerging market currencies could lose ground in Q1 of 2025.
Source: MSCI Research. Emerging market equities are in gray. (click to enlarge)
Precious Metals in 2025
Investors and market participants often turn to gold, silver, and platinum not only for diversification but also for stability during times of economic and geopolitical volatility. Here’s a closer look at the market outlook for these key commodities in 2025 given the volatile geopolitical climate globally.
Gold
Gold enters 2025 following a robust 2024 that saw prices rise nearly 28% due to central bank purchases and geopolitical tensions. Moving forward, prices may see moderate growth but face downward pressure from higher interest rates and a strengthening US dollar.
Demand Drivers
Central banks in Asia are expected to continue increasing gold reserves as a hedge against economic uncertainty.
Risks
Prolonged Federal Reserve monetary tightening could cap price growth.
Market Participants
Market participants should keep a close eye on Central Bank monetary policy. This coupled with potential geopolitical risks could be key to market moves in 2025.
Silver
Silver continues to benefit from the gap between actual demand and supply. Silver, valued both for industrial applications and as an investment, is also poised to benefit from the push for renewable energy, particularly solar technologies. However, weaker global manufacturing activity and a strong US dollar could introduce volatility and cap the potential gains for silver prices in 2025.
The chart below shows the discrepancy between silver supply and demand.
Source: LSEG. Supply Line – Blue. Demand Line – Orange (click to enlarge)
Key Areas to focus on
China and the economic recovery could be a good sign for silver prices, as this will likely lead to an increase in demand in 2025. Heightened demand, and the current supply available should, in theory, push silver prices higher.
US economy and its impact in 2025
The US economy will remain a focal point for global markets as inflationary trends, monetary policy, and fiscal changes shape the global trading environments.
The resurgence of the King Dollar may add downside pressure on the AUD and CNH
Incoming US President-elect Trump’s White House administration has already significantly impacted the financial markets even before Trump’s inauguration day on 20 January 2025 as the 47th president of the US.
Trump’s proposed deep cut on the corporation tax rate from 21% to 15% will likely further increase the US budget deficit. In addition, the proposed higher trade tariffs of 60% on Chinese products and the rest of the world’s exports to the US, ranging from 10% to 20% may also revive inflationary pressure in the US economy.
The net effect of Trump’s proposed policies is higher longer-term US Treasury yields, which the bond vigilantes have already responded to in the past four weeks.
The start of the current US Federal Reserve interest rate cut cycle on 18 September 2024 saw a jumbo 50 basis points (bps) cut on the Fed funds rate. In contrast, the longer-term 10-year US Treasury yield traded higher and rallied by 88 bps from its 17 September 2024 low of 3.60% to print a high of 4.47% on US presidential election day, 5 November 2024.
After a brief three weeks consolidation from 13 November to 2 December 2024, the impulsive upmove sequence of the 10-year US Treasury yield has resumed, and it staged a bullish breakout above a significant resistance of 4.49% that potentially eyes the 5.20% major resistance in the coming first quarter of 2025.
The latest bullish impetus of the 10-year US Treasury yield has been the 18 December 2024 FOMC monetary policy guidance, where the Fed has signalled a transition from a “dovish” pivot to a “normalization” pivot, that suggests a less dovish monetary policy in the US in 2025 with an impending risk of zero rate cuts due to the policies of Trumponomics 2.0 that may ignite inflationary pressure in the US.
The boomerang effects of Trumponomics 2.0 have triggered a stronger US dollar, which is apparent in the movement of the US dollar index, which added to its gains since the ongoing medium-term uptrend that has taken form since late September this year. It rallied by another 2.4% from the day of the US presidential election, 5 November to 12 November 2024.
Incoming hawkish relations toward China
According to various media reports, Trump is poised to pick two personnel with track records of harshly criticizing China for key positions in his administration, indicating that the current frosty state of US-China relations may deteriorate further.
Senator Macro Rubio who is being sanctioned by China is likely to be appointed as the Secretary of State. House Representative Mike Waltz, who has declared that the US was in a “Cold War with the Chinese Communist Party” in 2021 is set to become national security adviser.
Hence, it is likely that Trump, who is being surrounded by hawkish trade relations advisers, may follow through on his campaign trail with proposed trade policies of higher tariffs on Chinese products heading to the US in the coming year.
Fig 1: Major trends of US Dollar Index, USD/CNH, AUD/USD & VIX as of 19 Dec 2024 (Source: TradingView, click to enlarge chart). A weaker yuan is a headwind to AUD/USD
During Trump’s first administration in 2016, he kickstarted the US-China Trade War in January 2018 when China countered with retaliatory tariffs on US agriculture products and a deliberate weakening of the yuan against the US dollar.
It was the yuan weakness that triggered a significant negative feedback loop into the Aussie dollar. From the start of the US-China Trade War 1.0 in January 2018 to March 2020, the US dollar rallied against the offshore yuan (USD/CNH) by 12% (see Fig 1).
The high-beta Aussie dollar (AUD/USD) is also dependent on the economic growth prospect of China due to Australia being a major exporter of industrial commodities such as iron ore. Hence, a weaker yuan may see less demand for Australia’s iron ore, which in turn may put downside pressure on the AUD/USD.
The fear of such a negative feedback loop may resurface due to a potential US-China Trade War 2.0, and market participants have started to react accordingly.
The US dollar index has already staged a significant bullish breakout above a key resistance at 106.65 which reinforces a potential multi-month impulsive upmove sequence of US dollar strength.
Next up to watch is the 7.3650 key resistance on the USD/CNH. A clear break out above it may ignite a profound negative sentiment towards the AUD/USD.
Technical analysis of AUD/USD
Fig 2: AUD/USD major trend as of 19 Dec 2024 (Source: TradingView, click to enlarge chart). Past performance is not indicative of future results.
The Aussie dollar has weakened dramatically against the US dollar since its 30 September 2024 high of 0.6943, where it tumbled by 10.7% to print an intraday low of 0.6200 on 19 December.
In the lens of technical analysis, the recent movement of the AUD/USD has exited a one-year-long sideways range consolidation since the 26 October 2023 low that is considered a major bearish breakdown below its former sideways range support of 0.6420/6360.
In addition, the weekly MACD trend indicator has continued to decelerate below its zero centreline after a prior bearish breakdown in the week of 11 November 2024 which suggests a potential entrenched major (multi-month) bearish trend is in place on the AUD/USD.
0.6800 key long-term pivotal resistance and a break with a weekly close below 0.6200 exposes the next major support of 0.5510 (see Fig 2).
On the flip side, a clearance above 0.6800 invalidates the bearish scenario to see the next major resistances coming in at 0.7140 and 0.7545.
US inflation in 2024 and 2025 outlook
Traders in 2024 remained focused throughout the entire year on inflation data; the US CPI opened the year at 3.12%, and its latest reading for November 2024 was 2.74%, showing that the disinflation process continued in 2024; however, the decline was held back by the services component. The core services started the year at 3.12%, with its latest reading in November at 2.76%. The Shelter component, under Services, was the most stubborn inflation component and the slowest to decline, with minor improvements seen only in November 2024. Shelter costs kept inflation data high throughout 2024.
Source: Bloomberg terminal – US CPI – Core CPI – Core PCE. Past performance is not indicative of future results.
The FED’s preferred indicator, core PCE, also reflects the disinflation process. It shows that the services sector decline throughout 2024 was also minimal, as most components, including financial services, insurance, and healthcare, held steady levels throughout the year. The only contributors that showed improvement under PCE Services were food services, housing, and utilities.
According to Bloomberg’s analyst surveys, the disinflation process will resume slowly in 2025. Specific contributors, such as insurance and healthcare, are also forecasted to remain at their current levels and may increase. The US CPI is predicted to be at 2.4% in 2025, compared to its average of 2.9% in 2024. Meanwhile, Core PCE is forecasted to drop further in 2025 to 2.3% compared to its 2024 average of 2.8%.
Other risk factors may impact inflation in 2025. Following Donald Trump’s victory in the US elections, the threat of tariffs and trade wars became real. Following Trump’s announcement that he plans to impose a 25% tariff on Canada and Mexico, the Canadian dollar and the Mexican peso fell as traders reacted to the news. Although the price moves corrected after, the increase in the US dollar against the Canadian dollar took price action above critical levels, which was previously a challenge.
The Federal Reserve’s actions and interest rate outlook for 2025
The Federal Reserve has had a tough job over the past few years; it began with COVID when the FOMC cut rates back to its range of 0.25% to stimulate the economy, which was then in 2022 followed by 11 interest rate hikes to fight the historical high inflation that followed. The FOMC took interest rates back to 525 to 550 within 11 months. The Federal Reserve pivot came in December 2023 when Jerome Powell announced that the FED would pivot and assured the markets that the FED monetary policy decisions would be data dependent; the Fed has consistently mentioned that the committee is monitoring data closely and will take action when necessary.
In 2024, traders remained on edge as they monitored data and positioned themselves ahead of the Fed’s decision-making days throughout the year. At its September 2024 meeting, the FOMC cut interest rates by 50 basis points, the first cut since 2020. As we approach 2025, traders may need to pay more attention to the incoming economic data, tariffs, and significant fiscal policy changes. Unless there is an important event or change, markets should still see further rate cuts in 2025; however, the size and frequency of the cuts will be challenging to assess in 2025. So far, according to Bloomberg analyst’s surveys for 2025, markets are looking at an average of 3 interest rate cuts of 25 bps each in 2025, distributed almost evenly among the eight FOMC meetings scheduled in 2025. These projections and percentages will change as markets react to events and the incoming economic data.
Canada’s Economy and BOC’s Actions in 2024
Source: Bloomberg terminal – Canada CPI. Past performance is not indicative of future results.
The Canadian economy grew steadily in 2024 at an annualized rate of 2.1% in the second quarter of 2024, surpassing expectations of 1.8%. Growth was supported by lower-than-expected inflation and expectations for aggressive interest rate cuts by the Bank of Canada (BOC). However, the growth didn’t last and dropped sharply in the third quarter to an annualized rate of 1%, less than the 1.5% BOC estimate; the drop was mainly due to weakness in goods production. On June 5th, 2024, the Bank of Canada was the first major central bank to cut its interest rate by 25 basis points; the decision took place as inflation data continued to decline. BOC’s move came ahead of the Federal Reserve a day earlier than the European Central Bank.
Inflation in Canada declined sharply in 2024; all items CPI opened the year at 3.4% in January and 1.9% in November 2024. The shelter component of Canadian inflation includes rented and owned accommodation, water, fuel, and electricity. Higher interest rates and higher rent costs were key reasons for higher inflation since early 2021. Improvements were only seen in the first half of 2024 as BOC began its rate-cut cycle, which helped ease the cost of owned accommodation. However, the rented accommodation remained above its average. Higher demand for rental units can be attributed to higher immigration, which led to higher demand. Immigration has also impacted the Canadian job market as more participants join the labor force.
According to Bloomberg’s analyst surveys, the median expectation for Canada’s CPI Y/Y in 2025 is to remain steady near the BOC’s inflation rate target of 2.0%. The BOC’s interest rate cut path began gradually by cutting three times x 25 bps each, followed by two aggressive cuts of 50 bps each in October and November 2024, bringing interest rates down from 5% to 3.25%. The analysts’ surveys suggest that expectations remain mixed regarding rate cut frequency for 2025. However, the overall forecast sees an average of 2 – 3 further 25 bps cut in 2025, bringing the rates down between 2.5% – 3.0%, with the highest expectations for January 29th, 2025, and April 16th, 2025 meetings.
Technical analysis
EUR/USD weekly chart
Source: Tradingview.com. Past performance is not indicative of future results.
The overall long-term chart context reflects a “Rising Wedge” formation for the downtrend, which began in mid-2021 (red line). Price action attempted to break below the lower pattern border several times, but this only worked during the US election week, when the exchange rate fell from 1.0920 to 1.0330. Price action has partially recovered and is near the 1.0500 area.
A confluence of resistance lies above price action near the 1.0615 area, represented by the intersection of a declining trendline extending from July 2023 (dotted red line), the intersection of the EMA9 and SMA9, and the monthly pivot point of 1.0615 standard calculations. Another resistance level lies above price action, represented by monthly R1 of 1.0899 and the annual PP of 1.0920.
For the past five weeks, the price has found support above the lower border of its trading range, marked by black lines. It attempted a “three inside up” candlestick pattern; however, the upside move has faded, as the price’s initial reaction following November’s NFP numbers release was short-lived.
The Stochastic Indicator aligns with price action, and the %K line is poised to cross above the %D line. The chart marks a positive divergence between the later part of the declining price action and the Stochastic.
USD/JPY Weekly Chart
Source: Tradingview.com. EMA: Exponential Moving average – MA: Moving Average RSI: Relative Strength Index – % K: Fast Stochastic, %D Slow Stochastic MACD: Moving Average Convergence Divergence – Pivot Point: PP Support: S – Resistance: R
The overall context of the chart shows that price action has been trading in an uptrend since early 2022 when the Fed began raising interest rates. Trendlines 1 and 2 mark the uptrends on the chart.
Following the US elections, the US dollar rose against all other currencies, reaching a peak of 156.80. In the following weeks, it failed, breaking below trendline 1 and forming a bearish engulfing candle for the November 25th, 2024, weekly candle. It remained below the critical technical levels, the monthly PP of 151.98 and R1 of 154.49.
The US dollar attempted a rebound in early December, breaking and closing above the monthly PP of 151.98; however, it has yet to break back above the confluence of resistance near 154.49.
The price remains above two fast-moving averages, EMA9 and SMA9 below, and the intermediate moving average, SMA20.
Fast RSI (relative strength index) 7 aligns with price action, returning to a neutral level after reaching its overbought territory. The stochastic is in line with the price; the %K line is poised to cross below the %D line.
USD/CAD weekly chart
Source: Tradingview.com. Past performance is not indicative of future results.
USD/CAD has been trading within an ascending formation, as marked on the chart in Areas A and B. Price action traded around the median line (purple line) for an extended period, and the line acted as support and/or resistance on multiple occasions.
Following the US elections, price action rose, broke, and closed above the ascending formation’s upper border (red line). It has been trading above it as the US dollar remains dominant against major currencies.
Price action remains significantly above its monthly PP of 1.40002, the annual PP of 1.3414, EMA9, SMA50, EMA200, and SMA200.
Non-smoothed RSI (RSI 5 – Close) is in line with price action and is currently at its overbought levels.
Contributing Authors
Follow Zain on Twitter/X for Additional Market News and Insights @zvawda
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