Year in Review: Markets, Central Banks & Currencies – AIB Market Talk 2025 Finale

Join Jane Kavanagh from AIB’s Corporate Treasury desk and AIB Senior Economist John Fahey for the final Market Talk podcast of 2025. In this special year-end episode, they reflect on a year dominated by uncertainty, trade tensions, and shifting central bank policies. Tune in for:

• A recap of 2025’s biggest market themes, including the impact of US tariffs and global trade agreements.
• Insights into central bank decisions: Fed, ECB, and Bank of England rate moves and what’s next for 2026.
• Currency market highlights: Dollar weakness, euro resilience, and sterling’s rollercoaster year.
• Forward-looking views on economic growth, inflation, and what could shape the markets in the year ahead.
• Quick-fire predictions for euro/dollar and euro/sterling pairs.

Stay informed with expert analysis and practical outlooks for the new year. Subscribe to AIB Market Talk for ongoing financial market insights.

Visit our website and subscribe to receive AIB's Economic Analysis direct to your inbox. 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

Chapters

• 2:36 Future Monetary Policies and Market Trends
• 8:15 Rate Cuts by the Bank of England
• 10:40 Impact of Central Bank Policies on Currency Performance and Future Predictions
• 14:35 Trends and Future of sterling and euro in the Context of Political and Economic Challenges
• 18:05 Euro Dollar and Euro Sterling Market Trends

Transcript

18 December - Market Talk v3

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

 0:11
 Hello, and welcome to our AIB Market Update.

 0:14
 I'm Jane Kavanagh from our corporate Treasury desk.

 0:16
 And for our last podcast of 2025, I am joined by AIB Senior Economist John Fahey, where it's time, John, to look back in 2025, we might talk central banks and a little foreign exchange and have a peek at what 2026 might bring.

 0:30
 John, 2025, fair to say, uncertainty dominated the markets when we sat here 12 months ago wrapping up 2024, we expected it to be bumpy and it delivered.

 0:40
 It definitely did.

 0:41
 And bumpy and uncertainty are many of the words that were used to describe the year.

 0:45
 And a big aspect to it obviously was around increased trade tensions, especially in relation to the US administration and the tariffs that were announced in Liberation Day in, in early April.

 0:58
 So, so for much of the early part of the year, it was all about the build up to these tariff announcements and the uncertainty around it.

 1:04
 And then in the aftermath, it was the implications, uh, on the back of that.

 1:09
 And what we did see in the first couple of months of the year was a lot of activity economically was brought forward in terms of trade and production before those tariffs were announced in early April.

 1:21
 And then we saw in Q2 then a bit of a pullback after a lot of it was front loaded into the first quarter.

 1:27
 So it did have a distorting impact in terms of just general economic activity.

 1:31
 But one thing to point out though, you know, once the tariffs was announced, there was a lot of Armageddon talk in the markets and all that.

 1:37
 But what we've seen is, and all the major economies, you know, have shown resilience and the US economy still expected on a track to outperform the eurozone and the UK and many of the other advanced economies this year.

 1:49
 So plenty of noise, plenty of discussion, still a lot of uncertainty We've seen in the last 48 hours around the trade agreements that because you know, trade agreements have been put in place, for example, with the UK and with the Eurozone, but they're very much political agreements at the moment.

 2:04
 So, you know, when we look ahead to 2026, there still is an aspect of uncertainty in relation to trade because the underlying terms conditions for many of these trade agreements have have have yet to be put in place and and ironed out property.

 2:16
 But as you say, first half 2025 uncertainty dominated and it was pretty much all to do with tariffs for the most part, tariffs and and trade tensions.

 2:28
 So taking that into account, John, let's break this down a little bit more by looking first to the central banks and, and maybe let's start with the Fed.

 2:36
 I think they cut rates this month for 1/3 successive meeting to 3 1/2 to 375.

 2:43
 I'm finishing the year exactly as markets had anticipated.

 2:45
 Actually last December.

 2:47
 The tone this time came ambitious come across a bit of a surprise though.

 2:52
 So as you said there in terms of, you know, there was a split when the last meeting in the most recent meeting in terms of the voting breakdown, it's it's been the most split it has been in over in over six years on that.

 3:04
 So that does add a bit of a complication in terms of where we go from here with the Fed.

 3:09
 And also you do have a change coming up in the cheer next year.

 3:13
 But what we did see though is there was no unanimity within the Fed for the latest rate cut.

 3:19
 So it just creates a bit of uncertainty in terms as we look ahead and we'll talk about that in a while, I'm sure.

 3:24
 As to what to expect from the Fed next year, Yeah, I mean, in the run up to the meeting, they kind of had, if I'm not mistaken, downplayed the inflation risks that were there.

 3:33
 Didn't they mention that the tariff driven price increases were providing one time shocks?

 3:37
 So what does that look like going forward and then into next year, I suppose, John.

 3:41
 Yeah.

 3:41
 Well, from the meeting that the last day in the press conference when Chair Powell, the focus did seem to shift back to the labour market and they were seem to be more, uh, you know, discussions around the softness in the labour market.

 3:53
 So we always say it, but really the labour market is probably the key thing on the inflation aspect.

 3:58
 They expect that any sort of upward pressure from tariffs is starting to obey.

 4:03
 So really in terms of when we look ahead, the extent of rate cuts from the Fed will very much depend on what's happening in the labour market.

 4:11
 And the Fed has acknowledged themselves the softening in the labour market data.

 4:15
 And another issue that's been in the US in the last couple of months has been the, the, the shutdown, which will was the longest in history, which delayed a lot of data getting out or some data just cancelled altogether.

 4:26
 So that did add a complicating factor.

 4:27
 But we do have, we're starting to catch up on that data now.

 4:31
 So in the early part of next year, that's what the Fed will be very much focused on what's happening in the labour market.

 4:36
 But they've acknowledged the softening trend in terms of labour market conditions.

 4:40
 And you know, how softer and how weaker the US labour market gets would be the precondition to the extent of rate cuts we get from the Fed next year.

 4:47
 The Fed themselves are only guiding one cut next year year.

 4:51
 Where's the markets, You know, expecting potentially 2 to 3.

 4:55
 And our own view would be that, you know, we see rates in the US getting down towards 3%, so another at least another 50 basis points from here, which it was 25 more than the Feds currently guiding.

 5:08
 But if you look at those underlying data on the US labour market, it does look justified of at least 50 basis points next year, John.

 5:16
 Looking to the ECB then, ahead of this month's meeting, Lagarde had been quoted saying monetary policy was in a good place.

 5:22
 So no surprise then that rates were left unchanged at 2%.

 5:26
 Incidentally, as markets had also predicted our price to where they would finish the year out at.

 5:32
 Talk to us a little bit more about that.

 5:34
 Yeah, well, you know, the last couple of ECB meetings have been very much in line with expectations for no changes.

 5:41
 You mentioned the phrase they're good place that's been mentioned by ECB Governing Council members are policy as well positioned.

 5:49
 So they've been guiding for the last while that they're very satisfied with where policy is.

 5:53
 Like the last rate cut we got from the ECB was, was back in June and we've seen 200 base points in the, in their easing cycle.

 6:02
 And we had said at the start of the year, if you recall our earlier podcast that we felt that rates would get to 2% this year and 2% would be the low point.

 6:11
 So it's turned out that way.

 6:12
 And when we look ahead to next year, we don't see the, the, the ECB stirring from 2%.

 6:18
 Now if they do move, the risk is that it's lower rather than higher.

 6:21
 It's another rate cut rather than a rate hike.

 6:23
 But we think 2% is, is is is where the ECB is comfortable that rates been at.

 6:29
 If you look in terms of the underlying economic data from the Eurozone, it's still ongoing subdued growth.

 6:34
 We may see a bit of a pickup in the German economy next year with some of the stimulus helping.

 6:38
 But France, Italy and Spain are the three of the big 4.

 6:42
 You know, it's relatively sluggish growth in Italy and France, more solid growth in Spain.

 6:47
 But when you bring it all together, it's still overall growth somewhere in the region of 1 to 1 1/2% for the Eurozone economy.

 6:53
 So we think that from an inflationary perspective and underlying growth ECB won't move from 2% and that's where markets are priced that there'll be no further changes from the ECB.

 7:05
 The dial has turned a little bit against a further cut in rates though from the beginning of December, hasn't it John dealing a tiny bit towards the smallest chance of a hiking rates?

 7:16
 Well, at the moment what's priced in is very minimal.

 7:19
 Really the markets, you know, if you look at individual futures contracts for each month, you get a little bit of volatility there.

 7:25
 But in terms of what the market's pricing and still rates at 2%.

 7:29
 But we have seen a bit of an uptick in in Eurozone inflation and some ECB council members have talked around that.

 7:35
 So you know, that's something to focus on next year around, you know, whether there's upward pressure on inflation.

 7:41
 But at this stage, we don't think that there's any chance the ECB would actually contemplate a rate hike.

 7:46
 And if if there were to go again, we would think it would be more in relation to further policy easing because it's just that subdued growth outlook.

 7:53
 But as a, as I said, and as you've been saying since start of the year at 2% is where we think the low point is for your zone rates.

 8:00
 And we see them staying at that level through 2026.

 8:03
 And maybe then as we get into 2027, the market and the and the ECB themselves start to talk about the potential for a modest pace of, of, of rate hikes over that.

 8:13
 But we're still somewhere away from that yet.

 8:15
 OK.

 8:16
 Lastly, then in the central banks to look at for today's podcast, John is central bank meetings could be described as hotly anticipated.

 8:23
 I'm going to say the Bank of England would have been just that where they delivered a much debated cut, Umm, in the run up to it was debated anyway of 25 basis points.

 8:32
 Yeah.

 8:33
 And you know, in the last couple of weeks, the market had moved to price that in.

 8:36
 Now we've seen over the last year, you know, the, the Bank of England, uh, you know, split within the, uh, committee there around, uh, leaving rates on hold or, or, or rate cuts.

 8:47
 Uh, but you know, they, they had started the tea markets up for that cut this month, uh, and markets had broadly priced it in.

 8:54
 So no major surprise that the code has come there.

 8:56
 Now we've been saying for quite some time that, you know, if you looked over the course this year where markets are anticipating, we felt that markets, you know, weren't fully factoring in at the potential for further rate cuts from the Bank of England.

 9:09
 You know, for much of the year, the market was probably had rates close to 4%.

 9:13
 So you know, we've gone below that level now and our view had been that the underlying weakness in the UK economy would see the Bank of England cut rates further.

 9:22
 So that's how.

 9:23
 So as we look ahead to next year, we see rates getting at least to 3 1/2%.

 9:28
 Now if the economy remains weak, there is always the risk of going below that level.

 9:33
 What's priced in by markets at the moment is rates getting to at least 3 1/2 to the markets, not completely ruling out three and a quarter, but we think 3 1/2 is a reasonable expectation for UK rates next year.

 9:44
 So at least one further rate cut from where we are now in terms of the Bank of England and the Bank of England cutting cycle that's far that has farther to go than the other G7 economies, right?

 9:56
 Well, potentially, if you look at where rates are at the moment, they're still above, well above Eurozone rates and well above US rates.

 10:03
 So there is the potential for the Bank of England.

 10:06
 Now the Bank of England, the reason for that is though is because the inflation has been much stickier in the UK, especially underlying core inflation, which is related to service sector inflation and strong wage growth there.

 10:16
 So that's why the Bank of England has been much more cautious in its rate according cycle.

 10:22
 So yes, there is potential the Bank of England is further room to cut rates.

 10:26
 Uh, but as I said, we think 3 1/2 is a reasonable expectation, but you couldn't rule out, uh, them going below that.

 10:31
 But that would very much be decided and dependent on, uh, whether the UK economy loses momentum or it actually starts to pick up growth over the course of next year.

 10:40
 OK.

 10:41
 So in summary then just for the three central banks and looking out to 2026, John, we're looking at two potential cuts with the Fed, Yes, we're looking at unchanged with the ECB.

 10:52
 Yeah.

 10:52
 And then over across the water, we're looking at one further cost, at least one further at least.

 10:58
 Perfect.

 10:58
 Thank you very much.

 10:59
 Now all of what we've just been talking about lays the foundations, I'd say, of the currencies and how they performed through 2025.

 11:06
 You might talk me through the themes that we saw across the majors and maybe a little bit more detail.

 11:10
 First of the euro dollar, where the pair saw one of the largest annual rises and it was a low of about 1.

 11:17
 Want to have earlier on in February this year.

 11:19
 Yeah, when you look at the FX majors, the big team that comes true is, is, is dollar weakness over the course of the year?

 11:27
 If you think as we were talking last year, the dollar had some upward momentum after the victory of President Donald Trump in the US election in November.

 11:38
 And the market assessed that, you know, it was dollar positive.

 11:41
 But then in the early part of the year, we were still at that level, if you think euro dollars in, you know, January, February was trading below 102 with a low of 1015 in early February.

 11:52
 But then as we move closer to Liberation Day and those tariff announcements, the markets started to reassess the potential negative impact on the US economy and also, you know, underlying weakness that could materialise from that.

 12:05
 So we saw a sustained dollar weakening there.

 12:08
 So if you look, do you mention there specifically the euro dollar pair?

 12:11
 So if you look at the direction of travel that over the course of you know from March onwards in through April, all through the summer and by September, we, we, we got to a high of just above 1:19, 1/19/18.

 12:23
 So if you think that range this year has been basically 101 up up to 119 and in percentage move terms, euro dollars moved by around 12%, eleven to 12%.

 12:34
 So quite a sizable move there on that side.

 12:37
 But what's driven that has been dollar weakness and just uncertainty.

 12:40
 Now in the last while, things have settled back down to some extent and it's been more broadly in a 116 to 1 18 trading range.

 12:48
 So we briefly tested above 119, but euro dollar could not sustain a break above that.

 12:53
 And one of the reasons for that is that, you know, a lot of the dollar weakness is already probably baked into the dollar, but the euro is going to need something positive on its side to really drive that.

 13:04
 You know, as we look ahead to next year and we've talked previously around this, you know, 120 still the high watermark for euro dollar, you know, since 2014, it hasn't sustained a break above that.

 13:13
 And really to to move further above that sustained basis, it's going to take more than just dollar weakness and a lot of that weakness is already in the dollar.

 13:21
 Now it's going to take something on the euro side from an underlying strength.

 13:24
 So, OK, in terms of monetary policy, ECB on hold versus the Fed cutting is a potential positive for the euro, but then again that's already priced into interest rate market, so it might not have a huge currency impact.

 13:35
 So really what you need to see is some improvement in underlying eurozone economic growth and that's unlikely too, which is why we hold to the view that we don't rule out euro dollar testing above 120.

 13:47
 We don't see it sustaining a break above that.

 13:49
 So as we look ahead to next year, we still have an upward bias for a euro dollar pair, but it's much more modest gains from here on out compared to what we've seen this year.

 13:57
 It's interesting because I've seen some outlandish reports as to where euro dollar might go with energy prices being lower and the impact that will have an inflation in the states.

 14:06
 And so shall I put 120 is, is, is where we're benchmarking it like we've always had a, a bias and we had a heated debate.

 14:14
 We did, we did around this time last year, uh, on our bias for some dollar weakness over the course of the year.

 14:21
 So, you know, there was dollar weakness, but it was even much stronger than we had anticipated.

 14:25
 Uh, you know, we, we, we probably factored getting up towards one 15116 by the end of the year, not closer to 118.

 14:32
 So we still have that bias for the euro to make some gains against the dollar.

 14:37
 But from here on out, given the magnitude of moves last year, we think it's going to be more modest because we don't see in terms of when we look at the euro zone economic outlook, any major, you know, upside surprises to come from that, at least at the moment.

 14:49
 That was my argument last year.

 14:50
 And look where that got me.

 14:53
 Turning to the pound, John, that didn't have a too easy either with political woes, growth, inflation had it all.

 14:59
 Yeah.

 15:00
 So.

 15:00
 So what we saw was, you know, over the course of the year, sterling did lose ground against the euro, albeit because the difficulties for the dollar are even more pronounced.

 15:08
 Sterling actually gained around, you know, 6 to 7% against the dollar.

 15:13
 But against the euro, you know, if you look at the trading range, you know, from early year, it was just below 8083 P.

 15:19
 The low was 82.4.

 15:21
 And around mid November we traded to a high of 88.6 P.

 15:25
 But generally speaking, 88 P has been the, that the, the high point, it's struggled to sustain a break above that.

 15:32
 And the reason why that that euro sterling pair has moved higher, similar to the dollar or euro against the dollar, it's not been underlying euro strength, it's been weakness on the part of sterling.

 15:42
 So really from an overall majors perspective, the euro has benefited this year from difficulties elsewhere rather than its own underlying positive momentum.

 15:51
 Not a euro story, it's not a euro story, you know.

 15:54
 And from a sterling perspective, you know, a lot of the focus has been on the the weaker outlook and also around fiscal concerns and fiscal sustainability concerns within the UK economy and the budget, you know, ease some of those concerns temporarily.

 16:09
 But as we look ahead to next year, I think those concerns are still going to come back to the fore on that side.

 16:15
 And because of that, we do still have a slight upward bias in euro sterling, you know, potentially, you know, pushing up and, and holding a level above 88 P.

 16:25
 But similar to euro dollar view, it's it's more modest gains from here on out.

 16:29
 Given that year to date, Euro sterling is up around 6%, but we still have would have a slight bias for the to make some further modest gains against the OR for the euro to make some further modest gains against sterling.

 16:41
 Yeah, there's a lot of political noise umm, across the way in the last while that like I say, isn't necessarily going away, umm, not to leave cable out of it.

 16:50
 It had quite the roller coaster.

 16:51
 We take the euro out of it all together and bring it back down to the two currencies that were having all the woes that traded a high of 13788 mid year.

 16:59
 But I mean, back in January is all the way down at 121.

 17:02
 Yeah.

 17:02
 And and that's a pretty broad trading range.

 17:04
 But I said over the course of the year that pair has moved around a bit because of the negative drags and the respective currencies.

 17:12
 But I suppose the trend for the year overall has been for sterling to make some gains against the dollar, but it's more to do with dollar weakness rather than any underlying strength in the past on the part of sterling.

 17:22
 As we discussed, sterling has has its own difficulties, but the challenges have been more pronounced for the dollar this year.

 17:28
 So they've outweighed the the weakness are the difficulties for sterling, which means in terms of where the pair is at the moment, you know, you're trading in around that 133 to 134 range and we don't see any major movement in terms of where we are at the moment further out, you know, both economies politically there's challenges there that can impact the currency both on a rate cutting a bit, both central banks in rate cuttings.

 17:53
 There's not a lot of difference in them at the moment.

 17:56
 So as we move towards, you know, the early part of next year, we still see one 33134 has been reasonable expectations of levels for that pair.

 18:05
 OK, so taking all of that then in summary, euro dollar, we're talking about a handle around the 120 mark.

 18:11
 Euro sterling, you're saying 88 thereabouts for euro dollar, we would say, you know, you know, 11181 nineteen.

 18:17
 We're not ruling out the potential to test 120, but we think that that's still the the the ceiling for it at the moment.

 18:23
 But we wouldn't be calling out that as a specific level.

 18:25
 It's more can it sustain a break above 118 And you know, can it sustain a break above 119 that has that didn't happen last year, notwithstanding all the difficulties the dollar had.

 18:36
 So that's what we say.

 18:37
 We wouldn't rule out 120, but we don't think it would sustain a break above 120.

 18:41
 OK, John, 2 quick questions.

 18:44
 What would you say surprised you the most in the currency front last year?

 18:48
 Well, it's, it's just a degree of weakness in the dollar.

 18:50
 OK, We had, we had it, we had a bias for dollar weakness last year.

 18:54
 But it's just that the magnitude and how sharp it was caught us by surprise.

 18:59
 And maybe to some extent it's been the market over over, over, over went on it because, you know, we've seen dollar, you know, firm a little bit in terms of levels.

 19:08
 As I said, euro, sterling, our euro dollar couldn't hold that level above 119.

 19:13
 But that's the big surprise.

 19:14
 Last year from a currency perspective was just the the magnitude and the sharpness of that weakness in the dollar and the flip of that.

 19:20
 Then what least surprised you?

 19:22
 Well, what least surprised us into the weakness in the currency was plenty of headlines and media obsession with all things in the US and the Trump administration has kept, you know, generate a lot of headlines.

 19:34
 But as I would point out, the resilience in underlying economies and all the talk from some commentators of economic Armageddon and all that has has proven unfounded.

 19:44
 I said two last quick questions.

 19:46
 I have two really quick yes or no ones.

 19:47
 Is there more than a 50% chance then that euro dollar will trade above 120?

 19:53
 Well, there's more than 50 that trade above it, but I think it's less than 50% that it's sustained.

 19:58
 OK.

 19:58
 And euro sterling, yes or no, do you think we'll break 90P?

 20:03
 Not, not on a sustained basis, no, that's right.

 20:05
 Because last year I asked you about parity for euro, dollar and 80P on your starting and you got both of them right.

 20:10
 So there you go, right, John, we might wrap it up there then for this podcast.

 20:14
 And thanks to you and the team indeed, for all the podcasts through the year.

 20:17
 As always, to stay up to date with the latest market developments, simply subscribe to AI B's Market Talk wherever you get your podcasts.

 20:23
 And lastly, wishing all our customers a very Merry Christmas.

 20:27
 Have a Happy New Year.

 20:29
 Thanks for listening to the latest edition of AIB Market Talk.

 20:33
 Allied Irish Banks PLC is regulated by the Central Bank of Ireland.

 20:37
 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.

 20:47
 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.