Canadian 5 Bank Forecast, May 2025

Euro rallies on eurozone optimism as USD weakens and capital flows shift

The euro has gained significant traction recently, emerging as a key beneficiary of the US dollar’s broad decline and shifting global capital flows. Investor sentiment has turned increasingly positive toward the eurozone, supported by strong equity market inflows and expectations of expansive fiscal policy, particularly in Germany, where increased spending on defence and infrastructure is set to boost regional growth. The euro’s breakout from a prolonged trading range signals a broader reversal in trend, underpinned by fading “US exceptionalism” and growing concerns over American policy stability. With markets now pricing in relative economic resilience in Europe and potential interest rate differentials favouring the eurozone, the single currency is positioned for further appreciation in the quarters ahead.

The euro has recently pulled back from its April highs but remains supported by improving sentiment in the eurozone. Increased fiscal spending—especially in Germany—combined with reduced investor appetite for USD assets, has created a supportive environment for the euro. While EUR/CAD is forecast to average around 1.5898 in May, the trajectory will depend heavily on eurozone growth momentum and broader global risk appetite. Near-term fluctuations remain possible, but the structural backdrop favours a gradual strengthening of the euro against the Canadian dollar.

Pound strengthens on UK growth surge and hawkish BoE outlook

The British pound has shown strong performance in recent months, supported by improving economic momentum and shifting central bank expectations. After a period of stagnation in late 2024, the UK economy appears to have regained traction in early 2025, with growth estimates among the highest in the G7. This economic resilience, combined with market expectations that the Bank of England will remain less dovish than the Federal Reserve, has created a favourable backdrop for GBP appreciation. While some uncertainty remains around the UK’s trade negotiations with both the EU and the US, the pound continues to benefit from its relative insulation from global trade tensions. As rate cut expectations for the BoE are repriced and confidence in the UK outlook improves, the GBP will likely see further support.

The British pound has shown resilience against the Canadian dollar, underpinned by stronger-than-expected UK growth and a relatively stable monetary outlook. Forecasts point to GBP/CAD averaging around 1.8443 in June, with upside potential if UK economic data continue to outperform. The pound’s strength is closely tied to central bank rate expectations, particularly if the Bank of England proves less dovish than anticipated. Meanwhile, Canadian economic headwinds and a weaker USD environment may offer additional support to GBP/CAD in the coming months.