FX Daily: Abatement in AI risk helps the dollar
Lead — The desk sees a strengthening dollar underpinned by recovering sentiment around AI risks, as strong earnings from major tech firms like SK Hynix have allowed the market to shift focus from fears of recession to enduring economic strength. Per the full note from ING, markets are beginning to appreciate the dual threats of rising inflation and escalating energy prices alongside a hawkish Federal Reserve stance. Notably, the Reserve Bank of New Zealand (RBNZ)'s recent decision to hold its policy rate, despite a likely hike being fully priced in, illustrates how a central bank's stance can significantly impact currencies in this environment.
What the desk is arguing
The desk posits that the recent heartening news from the AI sector positively influences the dollar by promoting investor confidence. The focus shifts from AI-related volatility back to core issues such as rising inflation and energy costs that bolster the dollar's strength.
The market's response to the abatement in AI risks is illustrated by a 0.6% rise in Nasdaq futures and a correction phase from the index's recent lows, reflecting renewed optimism. As concerns around borrowing costs for high-yield sectors ease, appetite for the dollar increases amid mounting inflationary pressures, with observations from the RBNZ's policy meeting highlighting the potential volatility in currency valuations driven by central bank decisions.
Where it sits in our coverage
The current consensus target for EUR/USD is 1.1253, with a median forecast ranging from 1.1162 to 1.2000 by March 2026. Key forecasts show Rabobank targeting 1.1759, RBC at 1.1600, and Commerzbank projecting 1.1900 for the same period.
Our positioning aligns closely with this view, notably on the stronger end of the spectrum. The firm consensus indicates a median around 1.1700, indicating general confidence in the dollar’s trajectory against the euro.
How other firms see it
A majority of firms like HSBC and Deutsche Bank maintain a bullish outlook for the dollar, reflecting growing alignment with the desk's assessment. In contrast, firms such as Citi and Nomura display more cautious projections, potentially signaling a divergent sentiment depending on economic data outcomes.
Relevant indicators to watch include actions from the Federal Reserve and the upcoming earnings reports from tech giants like Alphabet and Microsoft, which may further influence USD sentiment, particularly in EUR/USD movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Strengthening dollar influenced by easing AI-related fears and positive tech earnings.
- 02Federal Reserve's hawkish stance amid rising inflation offers tailwinds for the USD.
- 03RBNZ's hold underscores sensitivity in currency valuations to central bank decisions.
- 04Market is refocusing on inflation and energy prices as primary USD drivers.
Market implications
Watch for USD strength maintaining momentum, particularly if earnings from major tech firms exceed expectations. A move past the 1.1700 level against the euro could affirm bullish sentiment, particularly in light of today’s FOMC meeting insights.
Risks to this view
Significant risks could arise from a dovish shift in Fed messaging or unexpected inflation prints undermining current market sentiment. Additionally, if tech earnings fall short or raise new concerns about profitability in the AI space, it could reverse the recent dollar strength.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Standard Chartered | Bullish | 1.1800 |
Scotiabank | Bullish | 1.1700 |
Danske Bank | Neutral | 1.1200 |
Articles FX Daily: Abatement in AI risk helps the dollar Published 07:40 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Fears of an AI bust have receded slightly, and the AI story has been helped overnight by impressive 3Q results from Korean chipmaker SK Hynix. This has allowed the market to focus on the core story of resilient growth, high inflation and the prospect of higher energy prices – all dollar-positive. Look out for the Fed, the Bank of Canada and the UK budget today Chris Turner , Francesco Pesole and Frantisek Taborsky Better news from the AI sector is softening a key threat to the dollar USD: AI risks recede, hawkish Fed to dominate dollar In an otherwise bullish dollar environment, one of the key threats in recent weeks has been the AI-driven equity correction, as higher borrowing costs questioned business models – particularly those of high-yield issuers.
Those fears are slowly being assuaged as the big beasts in this space continue to deliver. Overnight, SK Hynix announced strong third-quarter earnings, strong order books and an attractive distribution to shareholders. Nasdaq futures are up another 0.6% overnight and continue their 3% correction from last week's low.
Focus now turns to Alphabet and Microsoft, who report 3Q earnings after the market today. A little stability on the AI side has allowed the FX market to re-focus on the clearer and more present danger of higher energy, higher inflation and the central bank response. The Reserve Bank of New Zealand demonstrated overnight what failure to tighten can do to your currency.
A hike was 95% priced in, but the RBNZ voted 4-3 for a hold, citing weak domestic demand. NZD/USD fell 1.6% instantly. It is a very close call, but something similar could happen with the Bank of Canada today (see below).
But the main event today is tonight's FOMC meeting (see our preview here ). We suspect Chair Warsh will not want to tie himself in knots by citing a tightening in financial conditions, having learnt from the unruly market response to his press conference in July. Focus on restoring monetary stability should remain the dominant message and keep the dollar supported.
DXY is edging back towards its highs of the year, where a move through 102.50 opens up 103.00. Chris Turner EUR: First signs of weaker lending growth EUR/USD remains at the lows of the year as broad dollar strength and an unresolved French budget crisis dominate. Energy prices are at their highs and look to go higher on the prospect of the US and Israel attacking Iran after next week's US midterms.
On the eurozone side, activity remains resilient and Friday's release of 3Q26 GDP data should be relatively encouraging. However, yesterday's ECB bank lending survey showed tighter lending conditions and an unexpected fall in corporate loan demand. It may be too early for the ECB to pour cold water on market tightening expectations at tomorrow's press conference , but the risks look to be building in that direction.
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