Markets can’t decide: inflation or growth

USD: US dollar bullish momentum fizzles amid growing AI anxiety

A lingering sense of AI-related anxiety continues to weigh on markets, with tech stocks suffering another day of heavy losses yesterday. The Nasdaq Composite was down 2.6%, extending a weeks-long decline as investors continued to reassess the sustainability of the AI-driven rally.

Those concerns also appear to be influencing how investors interpret developments in the Middle East. Increasingly, markets seem more focused on the potential drag on global growth than on the inflationary consequences of rising geopolitical tensions.

Against this backdrop, Treasuries have staged a rebound as confidence in a persistently hawkish Federal Reserve has faded, weighing on the US dollar in the process. With the Fed now in its pre-meeting blackout period ahead of next week’s policy decision, the conditions were in place for this shift in market expectations to gain traction.

Meanwhile, tensions in the Middle East continue to escalate, helping propel Brent crude towards $114 per barrel during Asia market hours. Fresh attacks in Saudi Arabia have been reported, while the US government has ordered some diplomats to leave the country, highlighting the risk of a broader regional escalation.

Markets remain uncertain about the path ahead, with the approaching midterm elections adding another layer of complexity. Some investors may be anticipating that a Democratic victory, particularly one that secures control of Congress, could pave the way for tighter AI regulation from 2027 onwards. That prospect may be contributing to the more pronounced shift in market sentiment, with investor unease towards the sector becoming increasingly evident.

The DXY is trading just below 102, having reached its highest level since 2025 at 102.945 on 14 October.

In our view, the recent loss of momentum represents a pause within an otherwise intact bullish trend.

The hawkish Fed narrative could re-emerge next week when policymakers convene to deliver their latest policy decision, providing fresh support for the dollar. Until then, we would not expect selling pressure to push the DXY decisively below the 101.20-101.30 support area.

EUR: Another day, another euro sell-off

The euro endured another day of losses yesterday, as the spread between French and German government bond yields widened to over 170 basis points – the highest level in 15 years – amid mounting concerns over France’s fiscal outlook.

EUR/JPY and EUR/CHF led the decline. Those crosses have become the clearest expressions of France’s fiscal turmoil in recent weeks, given the safe-haven appeal of both the yen and the franc. EUR/CHF is particularly noteworthy, down 2.6% month-to-date.

When investors start questioning institutional credibility, whether fiscal or monetary, the franc is often the currency of choice. Switzerland’s reputation for political and institutional stability sets it apart.

That said, the bar is hardly high. Even against sterling, the euro is struggling to make a convincing case. GBP/EUR is trading at a 12-month high despite the UK being just days away from Budget day.

EUR/USD slipped around 0.1% yesterday. The 21-day moving average near 1.1250 continues to cap rallies effectively, although we would be reluctant to chase the downside while the AI anxiety theme remains in play. We expect the pair to remain anchored around the 1.12 mark into the weekend.

On the data front, keep an eye on today’s flash October PMI releases across the eurozone. Unsurprisingly, sentiment in France is expected to take a hit, but it will be equally interesting to see whether the weakness spills over into other member states. Either way, not much there for the euro to find fresh support.

GBP: Budget in the balance

Barring surprises, next week’s Budget should prove fairly uneventful. Some additional spending to ease cost-of-living pressures is likely, alongside modest tax increases aimed at rebuilding a fiscal buffer that has steadily eroded in recent months.

There is unlikely to be anything particularly ambitious on offer, but ambition is not necessarily what investors are looking for in the current environment. A pragmatic and disciplined Budget may well be the most credible option at a time when uncertainty remains elevated.

That is why sterling’s reaction may depend more on the Office for Budget Responsibility’s updated economic forecasts than on the policy measures themselves. A stronger-than-expected outlook, and the additional fiscal headroom that would come with it, could help ease concerns over the UK’s finances as borrowing costs climb and inflation pressures remain sticky. That would represent the most constructive outcome for GBP bulls.

Looking back at this week, sterling underperformed against the commodity currencies, which is hardly surprising given the surge in energy prices following the latest escalation in the Middle East.

GBP/USD has nonetheless edged higher, distancing itself further from the 1.32 area. Expectations of a hawkish Federal Reserve kept the pair stuck near those lows for several weeks before AI-related anxiety triggered a broader pullback in the US dollar.

GBP/USD is now trading just below 1.34. With both the Fed decision and the UK Budget due next week, investors may be reluctant to take strong directional positions before then. Those events should determine whether the recent rebound gathers further momentum or whether sellers regain the upper hand.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

Key global risk events

Calendar: October 19-23

All times are in BST

Have a question? [email protected]

*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.