Our latest views on the major central banks
The desk interprets the latest central bank commentary as signaling a cautious path ahead for the Federal Reserve and European Central Bank, emphasizing a likely pause in rate hikes beyond December. Per the full note , while the Fed is poised for one more increase this December, persistent inflationary pressures are leading to a tempered outlook as growth shows signs of slowing. This aligns with projections from major banks, which are factoring in geopolitical risks and energy costs into their forecasts, underpinning our mid-range targets for EUR/USD and other pairs reliant on these central bank dynamics.
What the desk is arguing
The desk believes that both the Federal Reserve and the European Central Bank are approaching a critical juncture, characterized by cautious monetary policy amid geopolitical uncertainties and evolving economic data. Per the full note , the Fed's anticipated rate hike in December may be its last before entering a prolonged pause, reflecting the cooling effects on interest-rate-sensitive sectors.
Supporting this view, historical data shows that a deceleration in economic momentum, coupled with benign wage pressures, underscores the Fed's reluctance to embark on aggressive rate increases. As highlighted in the commentary, persistent inflation concerns have prompted market participants to reevaluate their expectations, leading to a consensus shift towards only one more hike.
Where it sits in our coverage
Our consensus target for EUR/USD is currently 1.075, with a range spanning from 1.04 to 1.12, reflecting the divergent views within the market. Notable targets from other firms include: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
The desk's outlook aligns closely with jpmorgan, where the implied rate trajectory suggests a measured approach in light of upcoming geopolitical developments and fluctuating energy prices. However, this positioning sits near the upper bound of broader market perceptions, indicating potential volatility.
How other firms see it
Aligned firms, such as jpmorgan, emphasize a bullish trajectory for the Euro amid anticipated ECB actions, while bofa takes a more cautious stance, reflecting concerns over monetary policy efficacy against high energy prices. These contrasting opinions highlight the complexity of navigating central bank influences and economic signals.
Key pairs to watch include EUR/USD due to its direct correlation with ECB policy decisions and the USD/JPY as it mirrors Fed sentiments. Understanding these dynamics will be crucial for traders positioning ahead of potential rate decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed is likely to implement one more rate hike in December, with a focus on economic cooling signs.
- 02The ECB's outlook remains uncertain beyond December, influenced by geopolitical tensions and energy prices.
- 03Market consensus is shifting, reflecting growing caution among traders regarding central bank trajectories.
- 04Geopolitical risks could heavily impact inflation forecasts and central bank decisions going into 2027.
Market implications
Watch for the EUR/USD to respond to December's rate decision from the Fed, particularly as it approaches key technical levels around 1.07. Any shifts in energy prices due to Middle Eastern developments could also result in significant volatility across Eurozone currency pairs.
Risks to this view
A significant reversal would occur should inflation persist aggressively, compelling the Fed or ECB to adopt an unexpectedly hawkish stance. Should geopolitical tensions lead to dramatic energy price hikes, the inflation outlook may change, overpowering current projections.
Articles Our latest views on the major central banks Published 08:54 United Kingdom Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Here’s our take on what could be next for the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the People's Bank of China over the coming months James Knightley , James Smith , Carsten Brzeski , Chris Turner and Lynn Song Federal Reserve Strong growth, low unemployment and above-target inflation prompted the Fed to hike rates in September and signal that at least one additional rate increase is likely. This was all the ammunition markets needed to price in at least three additional 25bp moves. However, caution is creeping back into market pricing with officials skipping the October Federal Open Market Committee (FOMC) meeting despite higher-than-expected inflation prints.
Instead, the near-uniform message is that the Fed is under no immediate pressure to hike amid growing evidence that interest-rate-sensitive parts of the economy are cooling while wage pressures look increasingly benign. Additional Fed rate hikes will do nothing to ease tensions in the Middle East and likely do little to cool the strong pipeline of tech investment. We think the Fed will hike once more, at the December FOMC meeting, after which we expect a prolonged pause well into 2027.
European Central Bank Another rate hike in December looks like a done deal, but looking beyond this year, the outlook for the ECB is clearly less certain. In fact, two main factors will be crucial for the ECB in 2027. One, the intensity and duration of the war in the Middle East and, with it, the trajectory of energy prices.
Two, the degree to which higher energy prices translate into broader inflationary pressures. While the ECB expects these knock-on effects to materialise in 2027, so far, actual underlying inflation has remained well-behaved. In our base case scenario, we expect energy prices to fall in 2027, while weak final demand limits companies' pricing power.
This will keep the current inflation wave mainly an energy price shock. Against this background, the ECB can keep its powder dry in 2027 and might even consider a rate cut towards the end of the year. Bank of England We expect one more rate hike in February, after the BoE hiked rates for the first time since 2023 in early November.
Yet we don't rule out a hike sooner in December, if the energy crisis worsens. Inflation is headed above 4% and the Bank is worried that the crisis has now reached sufficient depth and longevity to justify further action. Still, there's little evidence so far of second-round effects.
Food inflation is remarkably benign. Our gauge of "energy intensive" inflation is actually down this year. And the jobs market is sufficiently cool, meaning wage pressures are unlikely to build materially.
For now, it's too early for the Bank to let its guard down. The data through winter and early spring will be crucial, particularly the April CPI report released in May, which is heavily affected by annual price resets. If by then there are still minimal signs of second-round effects, we think the Bank will feel comfortable turning more dovish by the summer.
Ultimately, this could enable the BoE to cut rates before the end of 2027. Bank of Japan BoJ policy normalisation will continue. In October, the BoJ reached a milestone: finally hitting its 2% inflation target.
That target had been set in 2013. The BoJ openly admits that real interest rates are negative. The debate naturally moves on to how quickly the 1.25% policy rate will be taken to neutral – commonly seen in the 1.75-2.00% area.
We now look for 25bp hikes at the December and March meetings as the quarterly tightening cycle continues. Market expectations are a little more aggressive than our view, looking for a 2.00% policy rate next summer. Our take is that 1.75% may be sufficient before government support measures weigh on headline inflation from next April.
At the same time, government pressure to avoid excessive tightening will ramp up as it tries to keep the cost of capital low in what should be a big year for Japanese investment. People's Bank of China The PBoC will remain in easing mode despite global tightening pressures. China’s economic backdrop remains conducive to further policy easing.
First, inflation remains very mild, likely to end the year under 1%, well below the 2% target set at the Two Sessions. Second, growth has moderated and become more unbalanced, raising risks for the economy. Domestic activity data weakened to the worst levels since the pandemic, and could clearly benefit from further policy support.
Third, the labour market looks soft, with lower wage growth and high youth unemployment. The PBoC has preferred targeted easing measures rather than policy rate cuts. Bank net interest margins hit record lows and global central banks shifted into rate hike mode in 2026.
We still see scope for both in 2027, especially if external demand starts to show signs of weakening. We currently look for a 10bp rate cut in mid-2027. Our view on the major central banks Source: Macrobond, ING "> Source: Macrobond, ING Central banks Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors James Knightley Chief International Economist, US James Knightley is the Chief International Economist in New York. He joined the firm in 1998 in London and has been covering G7 and Western European economies.
He studied economics at Durham… James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England. He graduated from the University of Bath with a degree in economics and joined ING in 2015. Carsten Brzeski Global Head of Macro Carsten Brzeski is the Global Head of Macro for ING Research.
Previously, he worked at ABN Amro, the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow… Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… Lynn Song Chief Economist, Greater China Lynn Song joined ING in January 2024 as the Chief Economist for Greater China.
Prior to joining ING, he worked at China Construction Bank International, China Merchants Securities (HK), and Haitong… In this article Federal Reserve European Central Bank Bank of England Bank of Japan People's Bank of China
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