Official White House Photo by Daniel Torok
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Deutsche Bank calls the start of the Dollar bear trend
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But, Pound will also fall against a dominant Euro
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Pantheon lowers GBP/EUR & raises GBP/USD forecast
“The dollar bear market is finally here,” say Tim Baker and George Saravelos, foreign exchange market strategists at Deutsche Bank.
The call marks a major shift in Deutsche Bank’s thinking about currencies as its analysts respond to meaningful shifts in global fundamentals under the second Trump presidency. They think the shifting tectonic plates pave the way to a stronger Euro and British Pound against the Dollar in the coming years, confirming the multi-year lows are in the rearview window.
These new forecasts can be viewed here.
“What has changed since the start of the year? The list of superlatives is long – the largest shift in US trade policy in a century; the biggest pivot in German fiscal policy since re-unification; the most significant reassessment of US geopolitical leadership since World War II, to name a few,” say the authors.
“Our view on all these factors is that the pre-conditions are now in place for the beginning of a major dollar downtrend,” they add.
Euro to Reign Supreme
Deutsche Bank expects EUR/USD to appreciate towards purchasing power parity over the remainder of the decade.
Purchasing power parity is a simple but fundamentally critical economic model that says the exchange rate must ultimately adjust to balance the cost discrepancies between the same good or service in two different economies. If the same good is more expensive in the U.S. than in the Eurozone, the theory says the U.S. consumer will substitute towards that European good. The process boosts the value of the Euro.
Flows have turned to favour Eurozone assets in 2025, with investors buying European stocks, which trade at lower values relative to those in America. The same can be said for bonds and other assets. Particularly given expectations that the Eurozone is to see a revival as Germany increases spending.
Pound-Euro Lower
For the Pound-to-Euro cross, what will matter is whether EUR/USD or GBP/USD appreciates the fastest.
Deutsche Bank’s targets show that EUR/USD will win the race, which means GBP/EUR must go lower. In fact, the forecasts show the exchange rate will favour the bottom of its multi-year range.
“This speaks to the ability of the euro to benefit more than the pound from repatriation flows,” say the authors.
What are the exchange rate forecasts for this year and next? Given the major upheavals we are seeing, we have begun tracking point forecasts at the major investment banks on behalf of our partners, Horizon Currency. We have added Deutsche Bank’s new targets to this document, which can be requested here.
Above: GBP/EUR might be pointed lower multi-year.
Deutsche Bank says relative growth dynamics between the Eurozone and the U.S. are shifting in favour of the Euro, powered by Germany’s decision to increase spending in infrastructure and defence.
However, the analysts think the Euro could also be set to benefit from ‘safe haven’ flows driven by increased bond issuance in the Eurozone as well as increased demand from euros as a reserve currency at global central banks.
Pantheon Makes Near-term Forecast Adjustments
The decline in the Dollar marks the end of U.S. exceptionalism, which saw all U.S. assets rally on the basis that the economy was outperforming its global peers.
Donald Trump’s seemingly ad hoc and disruptive approach to government has upended exceptionalism, not least because of the massive import tariffs that will raise inflation and lower growth.
Stagflation is rarely a good outcome for currencies and U.S. exceptionalism gives way to “sell America” in 2025.
Above: GBP/USD multi-year lows might just be in.
Fears about the Fed’s future independence are just the latest market worry, exacerbating the ‘sell America’ trade: the British pound struck its highest level in seven months against the Dollar on Monday, amidst renewed fears for the independence of the U.S. Federal Reserve after President Donald Trump launched a fresh attack on Chair Jerome Powell.
“The US dollar index declined to its weakest level since 2022 after President Donald Trump’s criticism of Federal Reserve Chair Jerome Powell contributed to fears over the independence of the central bank,” says Mark Haefele, Global Wealth Management Chief Investment Officer at UBS AG.
Elsewhere, strategists at Pantheon Macroeconomics say they are trimming their Pound Sterling forecasts vs. the Euro but raising them against the Dollar.
“Our call for one extra 25bp cut to Bank Rate this year would ordinarily mean that we trim our GBP forecasts,” says Elliott Jordan-Doak at Pantheon Macroeconomics. “But we think risk premia have overtaken rate differentials as the driving force in the currency markets.”
Pantheon raises its year-end Pound-to-Dollar forecast to 1.30 from 1.27, and cuts its Pound-Euro forecast to 1.18 from 1.20.
