**G10 Foreign Exchange Market Outlook: July 2025 Analysis and Forecast**
*Adapted and expanded from the original article by the ING FX Strategy team*
As we enter the second half of 2025, the G10 currency landscape is shaped by moderating global growth, diverging monetary policies among major central banks, and shifting capital flows. The foreign exchange (FX) market is at a crucial juncture, influenced by contrasting inflation dynamics, monetary easing cycles, geopolitical developments, and residual supply-side pressures.
This expanded report synthesizes the insights provided by ING’s G10 FX Strategy team while incorporating additional perspectives from economic data, central bank speeches, and broader financial market developments observed in Q2 2025.
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### Key Macroeconomic Themes Influencing G10 FX in July 2025
1. **Global Disinflation Progress but Mixed Outcomes**
– The broad disinflation trend across developed economies is continuing, led by easing energy prices, normalizing supply chains, and plateauing wages.
– However, progression toward 2 percent inflation targets has become uneven. The U.S. has seen persistent core inflation stickiness, while the Eurozone and UK have trended closer to target.
2. **Monetary Policy Divergence**
– Central banks are no longer moving in lockstep. Policy divergence is increasing, creating strong differentials in short-end yields, which is the current driver of currency markets.
– The Federal Reserve maintains a hawkish stance compared to its peers, while the European Central Bank (ECB), Bank of England (BoE), and Bank of Canada (BoC) have started easing cycles or hinted at imminent cuts.
3. **Repricing of Rate Expectations**
– Market participants are adjusting their expectations for future interest rate paths based on incoming data.
– Yield curve movements in the G10 sphere continue to shift currency performance, where high-yielding currencies (like the USD) benefit from carry trade support.
4. **Geopolitical and Fiscal Backdrops**
– US political risk tied to the November 2024 presidential election lingers into H2 2025. A renewed fiscal expansion under a Republican administration is seen as dollar-positive near term.
– Tensions in the Indo-Pacific and cautious China sentiment provide a cautious bias to risk appetite, impacting beta currencies such as AUD and NZD.
5. **Capital Flows and Liquidity Conditions**
– A reduction in liquidity, due to quantitative tightening or run-offs in central bank balance sheets (notably in the US), continues to cap excessive dollar weakness.
– Investment flows are now dictated more by sovereign yield spreads than equity market performance.
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### Updated G10 FX Forecast Overview (Q3–Q4 2025)
#### US Dollar (USD)
– Short-term strength persists due to:
– Resilient economic data, particularly consumer demand and services sector strength.
– Elevated core inflation sustaining Fed’s restrictive stance.
– Market anticipates only one 25bp cut by December 2025 versus prior expectations of at least two.
– 2-year Treasury yields near 4.8% support the dollar via interest rate differentials.
Near-Term View:
– Supported by carry and safe-haven demand.
– DXY forecast revised to 106 for end-Q3 2025 but expected to weaken gradually into 2026 as the Fed pivots.
Risks:
– Political uncertainty during debt ceiling talks or budget showdowns.
– A sharper slowdown in services inflation could prompt earlier Fed easing.
#### Euro (EUR)
– A mild rebound in Q2 growth and signs of wage moderation have kept the ECB on a cautious easing path.
– A second 25bp rate cut is priced in for September, with another likely in Q4.
Challenges:
– Weak industrial production and slowing German exports limit EUR upside.
– Real rate differentials still favor USD, capping EUR/USD gains.
Forecast (EUR/USD):
– Q3
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