Sterling today: Pound set to snap 7-week losing run as dollar slips on AI fears
The British Pound is poised to end a seven-week losing streak against the dollar, gaining as unease over U.S. AI-linked stocks and a recovery in long-dated U.S. Treasuries weigh on the greenback.
Intelligence analysis by Gemini 2.5 Flash
The pound and euro strengthened against the dollar, which faced pressure from investor concerns about AI stock valuations and a rally in the long-end of the U.S. Treasury market. Despite hot inflation data, investors are using long-dated Treasuries as a hedge, contributing to dollar weakness, while UK domestic economic data offered some support for sterling.
Imagine the grown-ups are worried about some super-smart computer companies getting too expensive, like a toy that everyone wants but costs too much. So, they're putting their money into safer piggy banks (government bonds) instead of those risky toys. This makes the U.S. dollar a bit weaker, which is good for the British pound because it means the pound can finally win against the dollar after losing for many weeks.
Analysis
The global currency markets are experiencing significant shifts, with the British Pound poised to break a prolonged losing streak against the U.S. Dollar. This reversal is primarily attributed to a broader weakening of the dollar, rather than strong UK-specific fundamentals, as investors react to growing unease surrounding U.S. AI-linked stocks and a notable recovery in the long-end of the U.S. Treasury market. The dollar's recent strength has been challenged by a perceived need for hedging against potential corrections in the high-flying AI sector, leading to a flight into longer-dated Treasuries despite persistent inflation signals. This dynamic suggests a complex interplay between equity market sentiment, bond market movements, and their subsequent impact on currency valuations.
AI Trade
The "AI trade" has been a dominant theme in financial markets, driving significant gains in technology stocks. However, the article highlights a growing apprehension among investors regarding the sustainability of these valuations. Chris Turner, global head of markets at ING, notes that investors are increasingly using long-dated U.S. Treasuries as a "middling hedge against a correction in the AI trade." This indicates a cautious sentiment, where market participants are seeking safer assets to mitigate potential downside risks in the technology sector.
The implication for the dollar is clear: as investors move out of riskier assets like AI stocks and into safer havens such as long-dated Treasuries, demand for the dollar can soften. This shift is occurring despite strong U.S. inflation figures, such as the "blew away consensus" September producer prices and expected high import prices. While short-dated yields remain supported by these inflation pressures, the flattening of the 2-10 year Treasury curve by nearly 20 basis points this week suggests a market grappling with both inflation and potential growth concerns, with the Federal Reserve described as "applying the brakes."
John Healey
While the pound's recent gains are largely attributed to dollar weakness, domestic UK news has offered some supplementary support. Britain's economy surpassed forecasts in August, with a notable surge in computer programming activity providing "fresh evidence that AI is boosting growth." This positive economic indicator offers a counterpoint to the broader narrative of dollar-driven currency movements, suggesting some underlying resilience in the UK economy. However, this positive sentiment is tempered by emerging fiscal risks.
The Guardian reported that Chancellor John Healey is preparing to announce a significant tax increase on banks in his upcoming October 28 budget. Industry figures anticipate the bank surcharge to revert to 8% from its current 3%, a move projected by TUC analysis to generate an additional £2.25 billion annually. This proposed tax hike, while aimed at ensuring banks "pay their fair share" according to TUC general secretary Paul Nowak, has drawn criticism from industry bodies like TheCityUK, whose head of policy, John Godfrey, stated banks "don’t want to eat in that restaurant." Such fiscal measures, coupled with sharply rising gilt yields, could significantly reduce the UK's fiscal cushion, potentially halving the £24 billion set aside in March, adding a layer of uncertainty to the UK's economic outlook.
1.1340/50
Looking beyond the immediate dollar weakness and UK specifics, the broader currency market is also seeing movements in the Eurozone. Eurozone September CPI is expected to be confirmed at 3.8%, and markets are pricing in nearly 75 basis points of further European Central Bank (ECB) tightening. However, ING anticipates only one more hike from the ECB, with French bond markets identified as a key factor influencing this outlook. This divergence between market expectations and ING's forecast could introduce volatility into EUR/USD.
Chris Turner of ING expects EUR/USD to enter "a decent consolidative phase," potentially leading to a move "all the way to 1.1340/50." This suggests a period of stabilization for the euro against the dollar, with a potential for further appreciation within a defined range. The dollar index (DXY) is seen struggling to clear resistance at 102.40/50, with support around 101.75/80, indicating that while the dollar is under pressure, a significant breakdown is not yet imminent. Turner emphasizes that the dollar is only ready for a substantial drop "when short end rates break lower," a condition not yet met. Furthermore, a deeper U.S. equity selloff is predicted to favor the Swiss franc over the euro, highlighting the nuanced safe-haven dynamics within the G10 currencies.
Key points
- The British Pound is set to end a seven-week losing streak against the U.S. Dollar.
- Dollar weakness is attributed to investor unease over U.S. AI-linked stocks and a recovery in long-dated U.S. Treasuries.
- Despite hot U.S. inflation data, investors are using long-dated Treasuries as a hedge against potential AI stock corrections.
- The UK economy beat forecasts in August, with AI contributing to growth, offering some domestic support for sterling.
- Chancellor John Healey is reportedly planning to increase the bank surcharge to 8% in the upcoming budget, raising fiscal concerns.
The pound's ability to snap its seven-week losing streak against the dollar suggests a potential shift in currency dynamics, offering relief for UK businesses involved in international trade. Furthermore, the UK economy's better-than-forecast performance in August, partly driven by computer programming, indicates underlying resilience and potential for AI to contribute positively to growth.
The dollar's weakness is primarily driven by fears of a correction in AI-linked stocks, meaning a significant U.S. equity selloff could still occur, potentially leading to broader market instability. Domestically, the proposed bank tax in the UK and rising gilt yields pose fiscal risks that could halve the government's financial cushion, creating economic uncertainty.