Dovish or Not? Central Banks Set the Tone for Year-End

In this episode of AIB Market Talk, host Joanne McCabe from AIB’s Customer Treasury Services team is joined by Senior Economist John Fahey to unpack the latest developments in global financial markets.

Tune in as they discuss:

• The outcomes of recent ECB, Bank of England, and Federal Reserve meetings, including policy decisions and market surprises.
• Why the ECB remains steady, the Fed delivered a rate cut but with less dovish guidance, and the Bank of England signals a possible cut in December.
• The impact of the US government shutdown on monetary policy and market data, and how its resolution could influence the Fed’s next move.
• Currency market trends, with a focus on the US dollar’s renewed momentum, euro-dollar forecasts, and the factors shaping sterling’s outlook ahead of the UK budget.
• Insights into interest rate expectations for the eurozone, US, UK, and Japan, and what these mean for investors and businesses as we approach year-end.

Whether you’re a business leader, investor, or simply keen to stay informed, this episode delivers expert analysis on the forces driving today’s markets. Subscribe to AIB Market Talk for regular updates and insights from AIB’s team of specialists.

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.

Registered in Ireland: No: 24173
Allied Irish Bank p.l.c is regulated by the Central Bank of Ireland

AIB Customer Treasury Services is a registered business name of Allied Irish Banks, p.l.c. Registered Office: 10 Molesworth Street, Dublin 2

Transcript

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

 0:13
 Hello, and welcome to our AIB Market Update.

 0:15
 I'm Joanne McCabe from our customer Treasury business, and I'm joined by AIB senior economist, John Fahey.

 0:21
 Welcome, John.

 0:22
 Thank you, John.

 0:23
 So look, getting straight into the interest rates, John, we had the ECB, Bank of England and Fed meetings in the last fortnight.

 0:30
 Anything interesting or unexpected come out of these?

 0:33
 Yeah, we had some, some some surprises.

 0:35
 As you say, it's been a busy fortnight across that.

 0:39
 I suppose the least eventful was the ECB meeting rates on hold for 1/3 successive meeting.

 0:45
 So the depot rate was maintained at 2% and the press conference very uneventful as well.

 0:50
 President Lagarde once again stated that policy is is still in a good place and that they take a meeting by meeting approach.

 0:57
 So, you know, when you look at overall, ECB still is an ease and bias, but there's absolutely no indication from any of the outputs from the ECB meeting in late October that they're contemplating any rate cuts anytime soon.

 1:11
 As I said, President Laguerre continues to emphasise that policy's in a good place.

 1:15
 So from the ECB perspective, you know, happy where policy is and, and, and our view is, has been for some time that we think 2% is, is the terminal rate is the low point for eurozone rates.

 1:26
 And, you know, the market's not completely ruling out another rate could bite middle of next year.

 1:32
 You know, it's in around 40% priced in.

 1:34
 So it's, it's not the base case in the market either.

 1:37
 Uh, so you can't completely rule it out, But, uh, you know, as I said, since the start of the year, we've been guiding 2% is the terminal rate and we don't, uh, see any reason to have to update or review on the back of that meeting, uh, the Fed.

 1:49
 So this was where we did get some surprise.

 1:51
 Now, in terms of the actual policy decision, everything went along expected lines, a 25 basis points reduction.

 1:57
 So that's the second cut in a row from the Fed.

 2:00
 So the Fed funds rate is now in a range of 3.75 to 4%.

 2:05
 But as I said, the press conference was a bit more eventful.

 2:08
 There was a less dovish tone than expected.

 2:11
 And basically what Fed Chair Powell did was he, he just let the markets know that very explicitly stating that, you know, a December rate cut is not a foregone conclusion.

 2:21
 It's far from it, to paraphrase his his words.

 2:25
 And that's because if you think it's in the context at the moment, OK, in the last 2448 hours, we've had some progress.

 2:31
 But when the federal meeting in late October, he obviously still had the government shutdown fully in place.

 2:39
 So when they looked ahead to December, you know, they, you know, had to be careful to tea markets up that, you know, markets were basically fully priced and in nearly a rate cut in December a few weeks ago.

 2:49
 But that FOMC is operating in somewhat of a data vacuum at the moment.

 2:52
 So it's no surprise that they kind of just tea markets up not to expect a, a, a rate cut in December that that use Powell's world.

 3:00
 It's not a foregone conclusion.

 3:02
 Our view is though, that we think that a rate cut still will happen in December.

 3:07
 The Fed's own dots, the interest rate rejections which they released back in September did have a rate cut implied for December.

 3:15
 And the market still is, you know, pricing in in around 6% probability to a rate cut.

 3:21
 And the news we've seen over the last over the weekend and the last 24 hours regarding progress on a resolution to the government shutdown should mean that the Fed will have more data than would have been the case over the next couple of weeks.

 3:33
 So we would still see a cut in December, even though it's less certain now after that Fed.

 3:39
 So that was the surprise from the Fed meeting that, you know, just that less dovish guidance and just the tea markets up that, you know, it's it's it's it's not a foregone conclusion.

 3:50
 But as I said, we still believe a cut will happen in December.

 3:53
 And given that looks as if there's progress on the government reopening more data that lends towards that view as well.

 4:00
 And finally, the Bank of England and no surprise either in terms of the policy action or inaction, should I say, Bank rate was maintained at 4%.

 4:09
 It's the second meet in a row we've seen no change, but it was a very close call.

 4:13
 The vote was five to four with four looking for an immediate 25 basis points cut.

 4:18
 And interestingly, one of those 5, Governor Bailey of the other four within that majority of five, they were concerned and, and around whether the disinflation trend was continuing.

 4:30
 His comments suggested that he's just looking for, he's still he, he views it is, but he's looking for more evidence.

 4:36
 So we think by December, we'll have that.

 4:39
 And, and that was one of the, in the press conference, one of the things he says they're looking for more data to confirm that disinflation trend.

 4:45
 So given it's 54, it only takes one swing vote to push it to a cut.

 4:50
 And the most obvious one there given his comments in the press conference is that if the inflation data continues to show that disinflation process that they will cut in December.

 4:59
 So we would guide that expected cut of 25 base points from the Bank of England at their December meeting, which is on the 18th of December.

 5:10
 So that would see the Bank rate end the year at 3.75%.

 5:13
 So the surprise from the Bank of England meeting was just the guidance in the press conference, it was more dovish guidance and basically opening up the possibility to a rate cut in in December, which is a more dovish tone than we saw from their previous meeting in September.

 5:30
 So to sum it up across all those three, ECB the least eventful, no changes as expected and no updated guidance and ECB seems to be very much on hold.

 5:41
 the Fed cut as expected but but less dovish guidance.

 5:45
 And then in contrast be we maintained rates but some dovish communications around the potential for a December cut.

 5:52
 And just on the you mentioned the government shutdown, do you see that coming to an end now?

 5:58
 I know this, yeah.

 5:58
 It looks as if the vote went through on the Senate and it looks as if over the next 24, 48 hours, uh, the House of Representatives, uh, would be voting on it and the expectation is that it will be passed.

 6:11
 So from a monetary policy perspective, what does that do?

 6:15
 Well, we've had a lot of data that hasn't got released in the US.

 6:17
 One of the, uh, key ones was the September payrolls was ready to go, but it couldn't get published.

 6:22
 So we expect that in the next, you know, over the next week, some of that data that was ready to be released to get published.

 6:28
 And also then it means that, uh, uh, by the time of the December meeting, uh, the Fed will, MI will have the, uh, November payroll data, uh, and in updated inflation data as well to base its decision.

 6:40
 So we would view the fact that this government shutdown seems to be getting resolved.

 6:44
 Uh, it means that the Fed will have more data for December.

 6:48
 And that's why we, we, we're still guiding that we expect they will cut in December, even though, uh, the time last week, obviously the shutdown was still in full impact and very little data and they were guiding that.

 7:00
 It's not a foregone conclusion.

 7:01
 So it's not a foregone conclusion, but we think that the resolution of the government shutdown makes it more likely than unlikely that the Fed will cut in December, given that they'll have more data to base that decision on.

 7:11
 OK.

 7:11
 We might come back to that when the foreign exchange rates them with the just in relation to the maybe the Bank of Japan some yen.

 7:20
 Yeah.

 7:21
 So of the of the the fourth of those kind of key meets, Bank of Japan, no real surprises there.

 7:26
 But where there was a little bit of a surprise was, you know, they kept policy rates unchanged.

 7:31
 And obviously the Bank of Japan is different to the ECB, the Fed and the Boe from the respective of they've gone through a cycle of coding interest rates and easing cycle, whereas the Bank of Japan has been engaged in a very gradual tightening cycle in terms of rate hikes.

 7:46
 But interestingly, from that meeting over the last week in the Bank of Japan, there was no clear indication of a December rate hike being on the cards there.

 7:54
 So it looks as if in the market's pricing that it won't happen to the first quarter of next year, so that they'll stay on hold again in December, given that they made no attempt to tea markets up that that December would see a hike.

 8:07
 So given what they've said there, a December hike seems unlikely and it's more likely to be in the first quarter of 2026.

 8:14
 OK, thanks for that.

 8:16
 Looking at the FX markets, the dollar seems to have gained some momentum over the last few weeks.

 8:22
 What's your forecast now for the end of 25 and into 26?

 8:27
 Tricky question.

 8:28
 There's Johann.

 8:28
 Thanks for that one.

 8:29
 Yeah, well, in terms of just where we are with the with the dollar, yeah, as you say, it's, it's definitely regained momentum over the last few weeks.

 8:37
 And I think what's underpinned that, which will help us to inform where we think dollar will go across the other May against the other majors, is that what we've seen in the last while is that the US has made progress in relation to a raft of trade deals.

 8:51
 And if you think back when we were discussing on the podcast earlier in the year, around the mid year point, obviously the dollar was very much on the back foot, uh, because the market had turned against the dollar given all the policy uncertainty in relation to, to trade and trade tensions and escalating trade tensions.

 9:06
 And what we've seen in the last couple of weeks is progress in a lot of those trade deals in terms of trade agreements been done with Japan and more importantly with China.

 9:16
 So that's helped take away some of that negative drag on the dollar.

 9:19
 And as you say, you know, upward momentum for the dollar, you know it's reflected in levels like just last week we saw euro dollar test below that 115 level to a low of just close to 114 six.

 9:34
 And it's not that long ago though that euro dollar was above 119 in in mid-september we traded as high as 1/19/18.

 9:42
 So you know, as I said, the last couple of weeks we've seen quite a turn around in the fortunes of the dollar and what's been driving that has been those progress on the trade deals and a reassessment of sentiment towards the dollar.

 9:52
 And interestingly, the early part of last week too was also noticeable that there was a bit of risk aversion in the markets and the dollar was benefiting from that, say of an appeal, which up to the, the last week or so hadn't really been the case because a lot of the risk aversion was US specific and it tended to weigh on the dollar.

 10:10
 Now, as we moved through the week, we did see the dollar give up a little bit of momentum, but but in level terms compared to where we are now, uh, to the start of the, the fourth quarter, you know, the euro dollar is down around not 2%.

 10:23
 Dollar is and euro sterling is down around 3% against the dollar.

 10:28
 The yen is down around 4% against the dollar.

 10:31
 So it's definitely a case of dollar strength against those currencies over the last couple of weeks.

 10:37
 But compared to where we are year to date, dollar is still is still below the levels of where it was at.

 10:42
 So it's still weaker by around roughly 8 to 10% on the exchanges.

 10:46
 But definitely in the last couple of weeks it's regained some momentum.

 10:49
 So the question is, is where do we go from here on out?

 10:51
 Well, we've always said that in terms of 120, we thought that was a level that would hold that on a sustained basis.

 10:59
 We didn't believe euro dollar would break above that 120 level.

 11:02
 So what we've seen in the last couple of weeks reinforces our view around that.

 11:06
 Now we did view that by the end of the year, euro dollar could be up towards 119.

 11:10
 Obviously, we're closer to to 116 than we are at the moment 119.

 11:15
 We still think the dollar is is vulnerable to some downside because if you look at it from a monetary policy perspective, ECB is done and does this, but the Fed still probably has a number of rate cuts left.

 11:27
 If you look at what the market's pricing in from a Fed's perspective, the market has fed funds rate getting towards 3% by the end of next year.

 11:36
 So the market still believes you get at least another 75 base points of cuts from the feds.

 11:41
 That's a negative for the dollar.

 11:43
 There still is a lot of economic uncertainty in in the US in terms of it, it is appears to be in terms of labour market weakness.

 11:50
 Now at the moment, because of what we talked about earlier with the government shutdown, we have a lack of, you know, official data on that.

 11:57
 But our view would be that we still can get up towards 119, towards 120.

 12:02
 But we always said that we didn't view a break above 120 has been achievable because for that to happen, we felt that he needed some positive momentum on the euro side.

 12:13
 And the Eurozone economy is still very muted, albeit you know from an interest rate perspective, interest rate differentials, ECB looks as if it's done and dusted for rate cuts.

 12:22
 But in terms of actual growth, you know, eurozone economy has struggled to grow much better than 1% this year, whereas the US economy is still likely to grow, you know around 2%.

 12:32
 So there's no huge momentum on the euro side.

 12:34
 And and the movement in euro dollar up towards 119 in September, all that movement is predominantly bit was driven by dollar weakness rather than anything specific on a euro strength part.

 12:44
 And what we've seen in the last couple of weeks is that flip around a bit and that dollar weakness turned into some gains for the dollar.

 12:51
 So we still think 119 up towards 119 is achievable as we move towards the end of this year into the beginning of next year.

 12:57
 But we still hold to the view that we think 120 is, is still the upper limit.

 13:01
 You know, if you look at that 120 level since 2014 and hasn't broken above it on a sustained basis.

 13:06
 And and you know and event in the last couple of weeks, we've seen that the dollar does have some momentum.

 13:11
 So we we hold to the view that we don't think 120 can be broken from a euro dollar perspective.

 13:17
 So you're looking at a trading range then where we've seen over the last while where it has tended to test below attempted to break below 115.

 13:24
 But because of that uncertainty is still there from a dollar perspective, you know it's back above 115 again.

 13:30
 So between now and the end of the year, we still would have some bias for a little bit of dollar weakness from here on out pushing back up above maybe 116.

 13:38
 But we still think that 120 is is the upper limit for euro dollar.

 13:43
 And when we look at euro sterling, I'll leave that bit to you, your next question so we can put that bit out.

 13:49
 Yeah.

 13:51
 Can I ask it then just about the government shutdown that first link would yeah.

 13:57
 So with the government shutdown lifting, you feel that there could be some opportunity on the dollar.

 14:03
 Well, in the coming days, what we know for sure is that if it does get passed and as we're speak, as we're recording this now, we expect that the House of Representatives will pass that that continued resolution vote which allowed the government to reopen.

 14:15
 So what that will give us, it will give us more data in the US.

 14:19
 Now, if it gives us labour market data, which is in terms of the September payrolls which were ready to go but couldn't be published, and we also get the November payrolls, I think that could actually be a negative for the dollar because it will confirm what some survey data, private sector survey data has been saying over the last couple of weeks, that the US labour market remains weak.

 14:39
 And what we saw last week with some of that private sector data when it came out, it did weigh a little bit on the dollar.

 14:45
 So we think more official data confirming that continued weakness in the US labour market could act as a headwind to the dollar because what will it do?

 14:54
 Well, it will tee up the markets again for the fact that the Fed are likely to cut now in December as that would be a negative for the dollar.

 15:01
 So that's why we still have at the moment where we're trading in euro dollar is just below 116.

 15:06
 We still we'd have a bias for it to push above that between now and the end of the year because as that official data starts to get released, especially on the labour market, it confirms that softening jobs conditions which will weigh in the dollar.

 15:19
 OK, thanks.

 15:21
 And to sterling.

 15:23
 So Euro sterling we've seen now settling in and around the 88 pence and anything that could be.

 15:31
 Yeah, well, sterling's been an interesting one in the last while because what we've seen is on the one hand we've seen as we talked about the dollar regaining momentum.

 15:38
 And on the other hand, we've seen, you know, a notable weaker tone to sterling.

 15:43
 And a big reason for that obviously is the upcoming budget on the 26th of November.

 15:49
 And you know, the the challenges that the UK government has to face in, in, in trying to resolve that fiscal, whole fiscal deficit that's estimated between anywhere between 20 to 3030 billion.

 16:04
 It was noticeable though, last week that after the dovish tone of the Bank of England meeting, there wasn't a major downward trend in sterling.

 16:13
 So to that extent, you know, some of the weakness in sterling may already be well baked in, in terms of levels from here on out.

 16:20
 And as you said, you know, we've been in or around that 88 P In fact, last week we test it to a new year today high in euro sterling 88.29.

 16:31
 But really Euro sterling has struggled to make a sustained break above 88 P.

 16:35
 Trading range has been in around 87 to 88 P for much of the last couple of weeks.

 16:39
 So the budget does create some potential for volatility for sterling between here and the end of the year.

 16:46
 And you know, as we move closer to that date, we expect to see some more hints of what could happen.

 16:51
 We've already seen the, the Labour Party government, you know, tea markets up to the fact that, you know, and tea, the public, the UK public up.

 17:00
 More importantly that, you know, Chancellor Ree said we all have to play our part.

 17:04
 So that does suggest that they may break some of their pre election promises around income tax rises.

 17:11
 Now the question is how does sterling react from there on out?

 17:14
 Well, initially if it looks as if it could weaken the economy substantially, then it brings into play further rate cuts from the Bank of England.

 17:21
 If you think at the moment the markets expecting or pricing in the Bank of England rate to get down towards 3 1/2 percent, so about 50 base points from where it is at the moment.

 17:34
 So if you think that the Bank of England would cut in December by 25 potentially and then another 25 in the first half of next year.

 17:41
 So it's fifty base points from the current levels, but if it looks as if that some of those measures could substantially weak the economy, then that could see interest rate differentials move further against sterling in terms of what's been priced in there.

 17:54
 So really it's, it's, it's hard to pinpoint exactly where sterling could be because there's so much uncertainty with what could be in the budget.

 18:03
 But definitely the budget will set the scene for potential sterling direction as we move through that date on the 26th November into the start, towards the end of this year, into the beginning of next year.

 18:15
 In terms of what level of measures are there potentially, how much this could slow the economy and on the back of that then could open up the potential for more rate cuts from the Bank of England.

 18:25
 But at the same time the market may view it positively the that the Labour Party government is getting a hold of that fiscal deficit because currency markets don't like questions around fiscal sustainability for currency.

 18:39
 So the initial reaction may be slightly negative, but if it looks as if they're getting that fiscal difficulties under control, then it could actually be viewed positively overall from a medium term outlook for the UK economy.

 18:51
 So that's why in terms of where we are levels between now and the end of the year, we still comfortable with 88 P being in and around the trading midpoint of that trading range between now and year end.

 19:02
 But you know, given all that uncertainty of the budget, you know, you couldn't rule out testing up towards 89 P, but we think 88 P is a reasonable expectation for where to settle by the end of the year.

 19:12
 OK, thanks for that, John, and thanks for your time and thank you to all our customers and listeners for joining us today.

 19:19
 To stay up to date and all the latest market developments, please subscribe to AI BS Market Talk wherever you get your podcasts.

 19:27
 Thanks for listening to the latest edition of AIB Market Talk.

 19:30
 Allied Irish banks PLC is regulated by the Central Bank of Ireland.

 19:34
 AIBNI is a trademark used under licence by AIB group UKPLC, authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

 19:45
 Allied Irish Bank GB and Allied Irish Bank GB Savings Direct are trademarks used under licence by AIB Group UKPLC, authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.