Navigating Volatility: What’s Driving FX and Central Banks this Autumn?

Join host Mark McKevitt from AIB’s Customer Treasury Team and AIB Senior Economist John Fahey for the October Market Moves edition of AIB Market Talk. In this episode, they break down the latest developments in the financial markets, including:

• Recent shifts in the euro, dollar, and yen, and the drivers behind currency movements
• The impact of political events, such as the resignation of the French Prime Minister and leadership changes in Japan
• What to expect from the upcoming UK and Eurozone budgets, and their implications for fiscal sustainability
• Central bank outlooks: ECB, Bank of England, and US Federal Reserve rate expectations for the coming months
• Key forecasts for EUR/USD and EUR/GBP through year-end and into 2026

Whether you’re a business leader, investor, or simply interested in market trends, this episode offers clear, expert insights to help you stay informed.

Visit our website and subscribe to receive AIB's Economic Analysis direct to your inbox. You can also find us on Twitter @TreasuryAIB . Our full legal disclaimer can be viewed here https://aib.ie/fxcentre/podcast-disclaimer.

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Transcript

 0:04
 You are listening to AIB Market talk, bringing you financial market insights from AIB's experts.

 0:12
 Hello, and welcome to our AIB Market October update.

 0:15
 I'm Mark Mckevitt from our customer Treasury business.

 0:18
 And today I'm joined by AIB Senior Economist, John Mcfahy, where we will discuss recent developments in the financial markets.

 0:25
 Welcome, John.

 0:26
 Thanks, Mark.

 0:28
 Plenty to talk about, John.

 0:29
 We might go to the foreign exchange currencies part first.

 0:34
 Looking at euro dollar, we've seen some recent euro weakness, current level below 116.

 0:41
 What do you think are the key drivers behind the recent moves?

 0:43
 Yeah.

 0:44
 So as you say, there's there's been plenty of action in the last week to a few days and you know, it's been eventful.

 0:53
 And really what we've seen is if you recall on many of our podcasts, we've discussed, you know, that weakening dollar trend that starts materialising in the second-half of February on the back of concerns over the US economic outlook and US fiscal sustainability amid the tariff announcements.

 1:11
 And, and really it reached a peak on the Liberation Day announcements.

 1:16
 But then we also saw some weakness in mid-september.

 1:18
 If you look at euro dollar in mid-september, we traded briefly above that, that 119 level.

 1:23
 So what's happened in the last week or so is that, you know, the dollar has regained some momentum and there hasn't been anything specific in terms of driving that dollar momentum.

 1:33
 It's, it's, there have been the markets looked at the other side of the some of those key pairs in terms of the eurozone, the UK and Japan, and it's seen that they have their own difficulty.

 1:43
 So that's what's benefited the dollar.

 1:46
 It's, it's the other difficulties elsewhere has seen it regain some ground.

 1:50
 So what do I mean by that?

 1:51
 If you look at the eurozone, you know, in the early part of last week, we had the unexpected resignation of the French Prime Minister.

 1:57
 So that weighed a little bit on the euro, but it just brought into focus again that it's not just the US that is these fiscal sustainability issues.

 2:04
 For from a starting viewpoint, we know the big focus is that November budget and whether the government will implement the measures needed to start to plug that fiscal gap.

 2:14
 And then in Japan, we've had, you know, the new leader there to catchy and expected to be elected Prime Minister, although there is a little bit of difficulty around with the coalition partner there.

 2:24
 But because she very much favours loose monetary and stimulus policy.

 2:29
 And from a fiscal perspective, the market's interpreted that that it could delay Bank of Japan rate hikes and Bank of Japan rate hikes were key underpinning of the dollar.

 2:39
 So it's really been negative news elsewhere that's helped the dollar.

 2:43
 And what we've seen is some of that positioning because if you look at positioning data over the last while, the market has started to get stretched short the dollar, whereas at the same time it was stretched long the yen.

 2:54
 So that reversal in sentiment towards BOG rate hikes or a reversal of yen positions and at the same time a reversal of those short dollar positions and that was reflected last week.

 3:05
 We saw that move in dollar, yen, it went back above the 153 level, albeit briefly.

 3:13
 And if you look at the euro too, EUR sterling were both fairly neutral in terms of positioning, but just probably some reversal of those short positions on the dollar in the last while given that there was negative news elsewhere helped the dollar.

 3:25
 So, so in short, there was an instance positive real underlying for the dollar.

 3:30
 It was more negative news elsewhere.

 3:31
 And you know, towards the end of last week, then we got a bit of a reversal of that with the escalation of US China trade tensions.

 3:39
 And really what we've seen over the last while is trade tensions play out negative for the dollar.

 3:43
 So the dollar doesn't benefit from that safe haven demand.

 3:46
 If it's escalating trade tensions, other safe havens tend to benefit.

 3:50
 So we saw that on Friday, we saw some of that momentum come out of the dollar and we got briefly back above 116 and and cable traded back up above 133 and dollar yen traded back below 151.

 4:02
 But then over the weekend, the more conciliatory tones from the White House in relation to China and trade deals and negotiations ease some of those concerns over a full blown trade war between the US and China.

 4:15
 So as you say there then as we talk now, you know we've seen over the last couple of days euro dollar test back below that, that 116 level and cable down or even tested below 133 again.

 4:27
 The shutdown also on the lack of data coming out on the back of that is that, yeah.

 4:31
 So it hasn't really impacted yet because as I said, despite all that, the dollar as we said over the last week or so has been on a generally upward trend.

 4:37
 And that's the point I was making.

 4:39
 It hasn't been anything really dollar specific because if you look at it, the underlying news in the US is, well, there's no underlying news because we don't have much data and the shutdown continues.

 4:49
 And that gives us, you know, a bit of a vacuum from a macro perspective.

 4:53
 Although if you look at Fed speakers over the last couple of days, they don't seem overly concerned yet.

 4:58
 They have some of their own surveys, the regional service, the Fed beige booking that to give them a handle ahead of their policy decision on the 29th of October 29th.

 5:09
 And just looking forward into the year end and, and, and forecasting the euro dollar.

 5:13
 I think your pencil in 1/20 as a potential level.

 5:17
 Is that something you're still comfortable with?

 5:19
 Yeah, like we've always said, and this is something we've talked about on the on the previous podcast as well as that, you know, 120 it's, it's, it's really going to need something positive from a euro perspective for it to stay in a sustain a break above 120.

 5:33
 In mid-september, we traded as high 119, just above 119.

 5:37
 I think it was 1/19/18 to be precise.

 5:40
 But you know, the move in euro dollar from below one O 3 at the start of the year to a high of 119 in in mid-september predominantly was driven by dollar weakness rather than some outright driver on the euro part.

 5:51
 OK, there's a little bit of positive news in the eurozone in the early part of the year around the German debt break and a bit more fiscal stimulus there infrastructure spending.

 5:58
 But since then, you know, we haven't seen a lot of progress on that and if anything is likely to be delayed.

 6:05
 So really to break that 120, we think we need, we, we believe we, we need to see something more positive on the Eurozone side.

 6:12
 And it's just not there at the moment in the numbers.

 6:15
 Eurozone growth is still fairly subdued, albeit the ECB may be done and dusted in terms of rate cuts.

 6:20
 So that's why 120 is the, is really the upper end of, of where we think it would be.

 6:24
 We, we believe it can test towards it.

 6:26
 But to sustain a break above it, we think it's going to need more than dollar weakness.

 6:30
 It's going to need something positive on the euro side to generate momentum because since 2014 we have been on a sustained basis traded above 120 and look into sterling, we're currently trading you're sterling around the 8.87 area and obviously all eyes at the end of November budget.

 6:49
 What's your sense on the pressing action from here?

 6:53
 Yeah, well, overall if you look at Euro sterling, it's still been fairly narrow.

 6:57
 The trading ranges, you know we we tested up towards 88 P and that's where we think it will trade out to the end of the year in around 88 P.

 7:05
 In the last couple of days we have seen it, you know, dip a little bit below 87 P, but you know, it hasn't been anything major.

 7:11
 It's broadly speaking for much of this year been in 85 to 87 P trading range and it's pushed out to the upper end towards 80 AP recently.

 7:20
 I think the big thing would be that November budget expect that you'll start to see some announcements before the budget itself, so maybe that the market doesn't get a complete and order information overload on that day.

 7:31
 So we just looked to see what the UK government will implement around fiscal consolidation needed to plug that fiscal gap.

 7:39
 And that may take some of the concerns of the UK economic outlook and fiscal sustainability away.

 7:44
 But we still, you know, see euro starting in near enough recent ranges with the potential to get up towards ADAP again for the end of the year.

 7:52
 But we don't expect any major breaker of euro sterling trading ranges because when you boil it back down, you know, both their economies fairly subdue growth.

 8:00
 The one differential over the next couple of months could be BUE rate cuts, maybe not this year, but in the early part of next year.

 8:06
 That's why we favour edging up towards 88 P rather than below 86 P over that time horizon.

 8:13
 Great.

 8:14
 And moving across to the interest rates and central bank world to turn to the ECB first, obviously pretty much on hold for some time or potentially for some time to come to cut cycle over for now, no change of visits in 26.

 8:30
 Yeah, we kind of alluded necessarily when we're talking about the euro in terms of where we are.

 8:33
 We our view since the start of the year had been that once the depot rate got to 2% that would represent the through for Eurozone official rates.

 8:42
 And anything that's happened since then, especially the last two ECB meetings, you know would would reinforce our view and and make us comfortable on that call that we think 2%.

 8:52
 Now obviously you can't rule out a further record if there was to be, you know, a downturn or you know, much weaker data coming in the eurozone.

 8:58
 The ECB has said it still has an easing bias and it will do it if needed or if warranted.

 9:03
 But we don't think there's anything there in the numbers, OK, growth is subdued.

 9:07
 We don't think there's anything there in terms of underlying loss momentum further to, to, to push the ECB to a rate cut.

 9:15
 So we think 2% from where we are at the moment out through towards the end of next year.

 9:20
 Great.

 9:20
 And into the UK, obviously all eyes on the budget and the fiscal gap that needs to be plugged.

 9:27
 What's your sense at the time of the next rate cuts?

 9:29
 Yeah, well, so we had been expecting another rate cut before the end of this year.

 9:33
 And we've kind of paired that back a bit now because the last Bank of England meet and give no indication that they were ready to to to cut rates again anytime soon.

 9:44
 We wouldn't rule it completely out.

 9:45
 And really this November budget is going to really set the tone between now and the and the end of the year.

 9:50
 But what we would expect is a rate cut in the first quarter of next year in terms of market pricing.

 9:56
 You know where we are at the at the moment, the market's really not got that 25 base points cut from the Bank of England fully priced in till April.

 10:04
 We think it could happen in February because February is obviously a monetary policy, but port or month it's, it'll be enough months removed from the budget for the B we to at least have done some initial assessment of the impact.

 10:15
 So we think in the first quarter you get 25 basis points and we think you get another 25 as you move through the year.

 10:20
 So that by the end of 26 the Bank rate is down at 3 1/2% from its current 4% level.

 10:27
 So quite a gradual, yeah, very gradual is, is an understatement in terms of the pace of rate cuts there.

 10:32
 And finally to the US then obviously we've had the recent Fed minutes published and any insights into the current thinking?

 10:38
 And yeah, it was interesting because it, it, it did suggest that the, you know, we know it was in terms of everyone was in unison for a rate cut.

 10:47
 There was 1 member that wanted more than 25 base points.

 10:50
 But when you look at the minutes, actually the minutes suggest that there was a few within that that voted for 25 base points that could have been swayed to vote to keep rates on hold.

 10:59
 So that's less dovish than than maybe the press conference and the interest rate projections, which are known as the dots suggested.

 11:08
 But if you look what the market's priced in, the market's priced in roughly 50 base points by the end of the year.

 11:13
 It's not fully priced in, but it's, it's broadly close to being fully priced in.

 11:17
 And and that and we, we, we would have that view that another 50 base points.

 11:21
 So there's two Fed meetings which are on October the 29th and December the 10th.

 11:24
 So we think they go with 25 base points at each of those meetings.

 11:28
 So the bank are the Fed funds rate.

 11:30
 It's the ends the year at 3.6 to 5% are the range of 3.5 to 3.75.

 11:38
 Great.

 11:38
 Thank you for everything, John Money.

 11:40
 Thanks for your time and valuable insights.

 11:42
 And a big thanks indeed to our customers, colleagues and listeners for joining us on our podcasts.

 11:46
 As always, to stay up to date with the latest market developments, please subscribe to ABS Market Talk wherever you get your podcasts.

 11:53
 Talk to you again next time.

 11:56
 Thanks for listening to the latest edition of AIB Market Talk.

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