Volatile May for Foreign Exchange Rates: EUR, GBP, JPY, AUD, NZD, RON

The euro (EUR) emerged as one of the strongest performers, appreciating by approximately 10% over the past two months. This surge was primarily driven by the European Union's announcement of a €500 billion defense spending package, equivalent to 3.8% of Eurozone GDP. Additionally, improved manufacturing data and capital inflows from the U.S. bolstered the euro's performance. Analysts anticipate that EUR/USD may stabilize within the 1.1575 to 1.1200 range in May as markets digest recent gains and the temporary 90-day pause on U.S. tariffs.

The British pound (GBP) also saw gains, reaching a multi-month high of 1.3424 against the USD in April. However, the Bank of England's decision to cut its base rate to 4.25% on May 8, marking the fourth cut since August 2024, aimed to stimulate a cooling economy amid persistent trade challenges. This move introduced mixed reactions, with some analysts expressing concerns about the potential impact on the pound's strength.

The Japanese yen (JPY) strengthened by approximately 6% against the USD, influenced by higher Japanese interest rates and safe-haven flows during periods of global uncertainty. This trend was further supported by Japan's move away from ultra-low interest rates, contributing to the yen's appreciation.

Conversely, the U.S. dollar experienced a decline, with the U.S. Dollar Index dropping 5% in April, falling below 100 for the first time since 2022. This downturn was attributed to inconsistent policy from the U.S. administration, which undermined global investor confidence. Analysts noted that such policy shifts could signal a structural downturn for the dollar, drawing comparisons to previous significant declines in 1986 and 1973.

The Canadian dollar (CAD) and the Mexican peso (MXN) both strengthened against the USD. The CAD benefited from the U.S. administration's suspension of 25% tariffs on most goods from Canada and Mexico, leading to improved trade relations. The MXN's resilience was supported by Mexico's low unemployment, stable inflation, and ongoing trade negotiations with the U.S., restoring confidence in the currency.

In contrast, the Australian dollar (AUD) and the New Zealand dollar (NZD) faced challenges. Both currencies are sensitive to global economic health, and concerns over China's economic slowdown and potential rate cuts by their respective central banks limited their upside potential. The Reserve Bank of Australia was expected to cut rates by 25 basis points in May, with additional easing anticipated until February 2026.

The Romanian leu (RON) experienced significant volatility ahead of the presidential run-off election. The currency dropped 2.8% following the first-round results, prompting the central bank to spend at least €5 billion defending the currency. Investor concerns centered on Romania's fiscal health, as the country faced the largest budget deficit in the EU—over 9% of GDP—and uncertainty about future fiscal policy.

In summary, May 2025's currency market movements were shaped by a complex interplay of economic policies, geopolitical events, and market sentiment. While the euro, British pound, and Japanese yen demonstrated strength, the U.S. dollar's decline and the challenges faced by the Australian and New Zealand dollars highlight the dynamic nature of global currency markets.

Disclaimer: Please note any provider recommendations, currency forecasts or any opinions of our authors should not be taken as a reference to buy or sell any financial product.