AI trade goes up in smoke

USD: Remember remember…

The fifth of November lived up to its explosive reputation, with investors watching billions in AI-linked market value go up in smoke. What began as a post-midterm wobble has morphed into a full-blown reassessment of the AI trade, with concerns mounting that a stronger-than-expected Democratic showing could lead to greater regulatory scrutiny of artificial intelligence and a slower pace of data-centre expansion. The Nasdaq 100 suffered its largest one-day decline since March 2020 on Thursday and has now entered bear market territory, while Asian equities followed suit, with the Nikkei and Kospi both down around 6%.

The selloff is beginning to take on a more familiar feel. S&P 500 futures are threatening a weekly close below their 200-day moving average, a level last breached during the height of the US-Iran conflict earlier this year. The crucial difference is that investors are no longer merely reacting to geopolitical headlines. They are increasingly questioning the valuations and growth assumptions underpinning the AI boom itself, making this a much tougher dip to buy.

The flight to safety has boosted demand for Treasuries, with the 10-year yield falling towards 4.85%, its lowest level in two months, despite Brent crude climbing back towards $100 a barrel as hopes for a swift resolution to the Iran conflict fade.

For the dollar, the picture is becoming increasingly nuanced. It has recovered much of its post-election losses, helped by broad safe haven demand, with the Aussie and kiwi dollars bearing the brunt while the Swiss franc continues to outperform. Yet there is an argument that the dollar’s resilience may prove temporary if the tech rout deepens. Markets have pared expectations for a December Fed hike despite resilient labour market data, reflecting concerns that a slowing AI investment cycle could ultimately constrain growth and limit how much further the Fed can tighten. That suggests the dollar has scope to move lower to close the gap with tighter rate differentials against G7 peers.

For now, the dollar remains supported by safe-haven demand, but a deeper reassessment of the US growth story could become a more meaningful headwind in the weeks ahead.

The next firework

Attention now turns to the US labour market report today. The consensus estimate for job growth is around 65,000 in October, roughly double September’s pace, while the unemployment rate is forecast to hold steady at 4.2% and wage growth continues to moderate. Beneath the headline consensus, however, there is considerable uncertainty. Estimates range from as low as 26,000 to as high as 125,000, highlighting just how difficult the current labour market is to gauge.

Even a modest gain would likely be enough to signal that employment growth remains above the economy’s estimated break-even rate, which is trending nearer 25,000 as labour force growth slows. As such, investors will be paying close attention not only to the headline payroll figure but also to revisions, participation and wage data for clues on underlying labour market resilience.

A stronger-than-expected jobs report could provide a timely reminder that the US economy remains on relatively firm footing. Such an outcome would help keep another Fed hike firmly on the table and could offer the dollar some near-term support. Conversely, a softer print would reinforce the market’s recent dovish repricing and add to growing doubts about how much further the Fed can tighten as the AI investment cycle shows signs of cooling.

EUR: Haven flows halt the recovery

The euro’s recovery has quickly run into trouble. After benefiting from post‑midterm dollar weakness and briefly pushing above 1.12, EUR/USD has slipped back below the figure as a renewed bout of risk aversion drives demand for traditional safe havens.

The move highlights how fragile recent euro strength was. Last week’s inflation data did little to alter the ECB narrative, with markets still pricing around an 88% probability of a December hike. More importantly, the euro has largely stopped responding to ECB developments altogether. Instead, investors remain focused on broader political, fiscal and geopolitical risks.

That was evident overnight. Risk‑off flows lifted the Swiss franc and yen, with EUR/CHF down around 0.7% this week and extending an eight‑week losing streak, leaving the pair near its lowest levels since early June. The move suggests investors continue to use the franc as a hedge against eurozone-specific risks, particularly those emanating from France.

French fiscal concerns have eased from their peak, but they have not disappeared. At the same time, geopolitical uncertainty remains elevated, limiting appetite for euro exposure even as positioning remains heavily bearish.

The result is a familiar pattern: rallies struggle to gain traction while downside pressure re-emerges quickly. With risk sentiment deteriorating and haven demand returning, EUR/USD’s ability to hold above 1.12 looks increasingly important.

GBP: Hawkish BoE, muted pound

The Bank of England hiked rates by 25 basis points to 4% yesterday, as expected. The vote split, however, surprised. The decision to hike was unanimous (8-1), with Catherine Mann voting for a larger 50bp increase. This contrasted with expectations for a 7-2 split, with the more dovish members expected to favour a hold.

What also screamed hawkish were the revisions to the economic projections. The BoE now forecasts consumer price inflation to peak at 4.9% in the second quarter of next year, its highest level since September 2023, while CPI is not expected to fall below the 2% target until 2029.

The message from Governor Andrew Bailey at the press conference was clear: unless the conflict in the Middle East de-escalates, the case for another hike remains strong. Markets increased bets on further BoE tightening, bringing the probability of a move next month to just above 50/50. Around 33bps of tightening is now priced in by February 2027.

Gilts rallied, particularly at the short end, while the pound’s reaction was relatively muted. GBP/EUR remains capped by the all-important 1.20 level.

Andrew Bailey also noted that there has so far been little evidence of second-round effects from higher energy prices and welcomed the recent decline in energy costs amid renewed hopes for de-escalation. Brent crude has fallen by around 15% this week.

As a result, markets may have leaned into the “insurance hike” (or two) interpretation. Against an already priced-in tightening outlook, sterling struggled to find sufficient bullish impetus.

Looking ahead, the case for further BoE hikes appears stronger than the case for no additional tightening. With sterling rates among the highest in the G10, the currency remains an attractive proposition. Our sterling outlook remains constructive.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

Key global risk events

Calendar: November 02-06

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.