The Top 5 Currency Pairs to Watch After 2025’s Rate Shake-Up

Any decisions related to inflation rates enacted by central banks will always have an effect on currencies. Recent events clearly reinforce this point, and a handful of currency pairs are being closely monitored by industry experts.

Before delving into the top pairs to watch in the coming months, it is a good idea to briefly explain why interest rate announcements impact currency values. It will then be easier to appreciate why the best index trading strategies always account for central bank policies.

Interest Rates and Currencies: Two Peas in a Pod

While there are many reasons why a central bank may choose to raise or lower interest rates, these are not necessarily concerns in relation to this article. We instead need to emphasise the notion of investment flows, and their influence on supply and demand. Let's look at a generic example to better appreciate this point.

We will imagine that a bank chooses to raise its domestic interest rates. This often attracts foreign traders seeking a higher return on investment (ROI). In turn, the value of the currency in question tends to appreciate thanks to this increased demand. Of course, the opposite is also true. Falling rates will not generate a great deal of foreign capital. This may cause the value of the currency in question to fall.

While this is only a very brief summary, it still serves to illustrate how decisions made by central banks often cause fiscal "ripples" that extend far beyond its domestic borders. We can now move on to analyse five pairs that have already generated a significant amount of attention.

The Euro and the United States Dollar

To be fair, these currencies are always monitored by Forex traders (and index traders in general). The one difference that we have recently witnessed involves diverging monetary policies between the European Central Bank (ECB) and the United States Federal Reserve (Fed). Thanks in no small part to the influence that Trump-based tariffs continue to exert, many feel that the euro will strengthen in relation to the dollar. Assuming that the economy of the Eurozone continues to recover, this scenario should be even more likely to occur.

The United States Dollar and the Japanese Yen

Although the Japanese yen has always been considered a safe-haven currency, things have begun to chance. Indeed, the yen is currently the worst-performing G10 currency, and analysts feel that its value could continue to slide due to a rather loose monetary policy enacted by Japan's central bank. Even if their approaches become more stringent, a significant amount of volatility is likely to remain.

The second piece of this puzzle involves a wide interest rate gap between Japan and the United States. Assuming that the yen temporarily descends into more bearish territory, this could present an interesting opportunity for dollar-based investments. Although Japan may choose to implement further (modest) rate hikes, it is not certain whether these will provide the yen with the buoyancy to rebound from its current doldrums.

The Great British Pound and the Japanese Yen

This next example should not come as a great surprise to seasoned Forex traders. The GBP/JPY relationship has always been defined by a considerable amount of volatility; one of the reasons why it is often referred to as "the dragon". One underlying factor involves daily pip spreads that often exceed 100 points.

Although technical indicators certainly play a role, there are other factors to consider. Three key metrics include:

• The interest rate disparities between these two currencies.
• Opportunities for short-term profits during wide price swings.
• Traders who still consider the yen to represent a safe haven in relation to other currencies.

In other words, this currency pair could be suited for investors who are not averse to risk (such as scalpers and swing traders).

The United States Dollar and the Australian Dollar

Commodity traders are predicted to keep a close eye on these next two currencies. The USD/AUD relationship is heavily influenced by the prices of specific commodities (iron ore and gold are the two most prevalent examples). Having said this, we also need to remember that China is Australia's most significant partner. Analysts feel that the Chinese economy will continue to perform well. Although this may be a concern for western nations, the Australian dollar is likely to benefit as a direct result.

However, any decisions made by the Reserve Bank of Australia in relation to the United States Federal Reserve will also impact the USD/AUD relationship. Most wealth managers nonetheless feel that the AUD will continue to perform well (especially if the dollar begins to weaken further due to the fiscal policies enacted by the Trump administration).

The British Pound and the United States Dollar

This final pair is likewise extremely popular throughout the Forex sector, and it continues to feature prominently across platforms such as Eurotrader. While the USD/GBP gap was considerable at one time, this disparity has noticeably narrowed. Most attribute the relative decline in performance of the pound to post-Brexit economic jitters. Furthermore, the decisions made by the Bank of England (BoE) have sightly diverged from those taken by the Fed; resulting in even more room for volatility. This difference could significantly impact future USD/GBP price action.

A Global Ecosystem

One of the reasons why Forex investments have become so popular involves the ability to access this marketplace on a 24/7 basis. However, the fact that major currencies are inextricably linked to one another results in a decidedly complicated environment when it comes to predictions.

This is why partnering with a well-rounded investment platform has become critical. Keeping abreast of the latest currency-related news, monitoring data released by central banks, and gauging public sentiment are all powerful ways to remain ahead of the curve, and to execute sound trading strategies when the time is right.