Canadian 5 Bank Forecast, May 2025

Loonie gains ground as USD wavers on policy fears and growth concerns

The USD/CAD exchange rate has come under pressure as the US dollar weakens amid mounting concerns over US economic policy, rising tariffs, and slowing growth. The Canadian dollar has strengthened notably, returning to levels last seen in October, driven more by a broad retreat from USD assets than by strong domestic fundamentals. While Canada’s economy showed resilience in early 2025, a moderate slowdown is expected in the coming months. Even so, Canada is projected to outperform the US, where recession risks are intensifying. This divergence supports a stable interest rate stance from the Bank of Canada, contrary to anticipated Federal Reserve easing in 2026, reinforcing a favourable policy differential for the loonie.

Looking ahead, forecasts for USD/CAD are mixed. Some analysts predict the pair will trade within the 1.37–1.40 range through mid-2025. In contrast, others anticipate a potential rise to 1.44 by year-end, especially if U.S. economic conditions improve or if geopolitical tensions increase demand for safe-haven assets. Conversely, a sustained recovery in global commodity prices and a stable Canadian economy could support further Canadian dollar strength.

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.