Elections coming in Europe, Central Bank Moves, and Key Currency Trends to Watch for the Week Ahead

Euro (EUR) – Political Shifts and Economic Uncertainty

The upcoming German federal election is set to be a pivotal moment for the euro. While market volatility appears contained for now, underlying risks remain. The CDU/CSU is expected to lead, positioning Friedrich Merz as the likely Chancellor, potentially forming a coalition with the SPD or the Greens. Such a scenario would ease concerns over the rising influence of the anti-EU AfD, which could otherwise create instability and pressure the EUR/USD down to 1.03. Should mainstream parties secure a strong footing, the euro could recover toward the 1.06 level.

Beyond politics, macroeconomic data will play a crucial role. The Eurozone flash PMIs and Germany’s IFO business sentiment index will be closely watched for signs of stabilization. Additionally, any resolution in the Ukraine conflict could drive economic optimism, though the EU’s secondary role in global diplomacy could limit the currency’s upside.

EURUSD H4 Chart 

US Dollar (USD) – Trump’s Policies and Market Sentiment

The dollar surged following Donald Trump’s election victory, fuelled by expectations of fiscal expansion and protectionist trade policies. While this initially strengthened the USD, concerns over a prolonged Fed tightening cycle and a potential return to the ‘Weak USD Doctrine’ could limit further gains. Market sentiment has softened recently, with traders reassessing the impact of tariffs and geopolitical shifts. The upcoming Core PCE inflation data will be critical in shaping Fed expectations and, consequently, the dollar’s near-term trajectory.

Japanese Yen (JPY) – Rate Adjustments and Intervention Risks

The yen remains a wildcard, driven by US-Japan interest rate differentials. The Bank of Japan is cautiously hiking rates, narrowing the gap with the Federal Reserve. This, combined with potential market interventions by Japan’s Ministry of Finance, could temper USD/JPY’s ascent. However, any aggressive trade moves from the US could reintroduce volatility, making the yen a preferred safe-haven asset.

British Pound (GBP) – Fiscal Concerns Weigh on Sterling

The pound has faced renewed pressure amid concerns over the UK’s fiscal trajectory. Rising borrowing costs and fears of budget overruns under a Labour-led government may necessitate austerity measures. While the BoE is expected to be less aggressive than the ECB in rate cuts, political and economic uncertainty keeps GBP/USD capped near post-election lows, with a recovery more likely in 2026.

Commodity Currencies – AUD, CAD, and NOK Outlook

• Australian Dollar (AUD): The AUD weakened during Trump’s first term due to trade tensions with China. However, with a potential renegotiation of tariffs, downside risks could be mitigated. The Reserve Bank of Australia’s relatively hawkish stance also supports the AUD’s resilience.
• Canadian Dollar (CAD): USD/CAD climbed past 1.45 following Trump’s tariff threats. The BoC-Fed policy gap remains a key factor, though Canada’s economic resilience could support a gradual CAD recovery.
• Norwegian Krone (NOK): Strong fundamentals, an active Norges Bank, and persistent undervaluation make NOK a compelling long-position candidate, assuming risk appetite remains stable.

Scandinavian Currencies – SEK’s Surprising Strength

The Swedish krona (SEK) has outperformed its G10 peers, driven by expectations of a European peace dividend and recalibrated monetary policy expectations. However, structural hurdles, including high unemployment and uncertainties around Sweden’s pension reforms, suggest caution. While EUR/SEK’s recent dip below 11.20 marks an eight-month low, sustained gains may require stronger economic confirmation.

Gold and Broader Market Trends

Gold’s outlook remains tied to Fed policy and global risk sentiment. While short-term downward pressure persists, concerns over fiscal dominance and potential threats to Fed independence could drive renewed demand into 2026.

With major political events, shifting monetary policies, and persistent geopolitical risks, the FX market remains highly dynamic. Investors should watch for key data releases, central bank guidance, and political developments to navigate the evolving landscape effectively.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.