FX Daily: AI jitters add fuel to USD rally
Current market dynamics showcase a strong rally in the USD, driven by equity turmoil and hawkish signals from the Federal Reserve. Per the full note , the ongoing sentiment shift towards safety amid tech stock declines, particularly in semiconductors, has led to a sell-off in currencies like the AUD and NZD, with the USD benefiting as a safe haven. Furthermore, underlying economic indicators, such as robust US growth forecasts, suggest continued support for the dollar. With EUR/USD trading at 1.1500, the market anticipates the ECB's struggle against poor PMIs could add to downward pressure on the euro. In contrast, a potential dovish tilt from the Fed in the medium term could introduce volatility into USD valuation.
What the desk is arguing
The desk posits that the combination of equity market instability and a hawkish Fed is propelling the USD higher, particularly against risk-sensitive currencies. This claim is substantiated by the recent underperformance of the AUD and NZD, which are falling in tandem with tech stock declines. The source highlights that market jitters stemming from Asian markets have already affected these currencies, supporting the USD's ascent.
As of now, core inflation metrics indicate that the US economy remains robust, prompting Federal Open Market Committee (FOMC) members to express worries about inflation, further solidifying the dollar's appeal as the safer option. The EUR, on the other hand, is struggling due to disappointing German PMIs, with the desk noting a noticeable pressure on this pair.
Where it sits in our coverage
Currently, the AUD/USD is trading at 0.7200 with a consensus target among firms for March 2026 at 0.6700 (ranging from 0.6600 to 0.7300). Key firms include: - Citi: 0.6700 (Mar26) - HSBC: 0.6700 (Mar26) - UBS: 0.7000 (Dec26)
This perspective aligns closely with the consensus target, with the desk positioning itself near the upper range of expected prices. Notably, the range forecasts reflect a median leaning towards the downside, suggesting caution among market participants.
How other firms see it
Firms such as UOB and Standard Chartered exhibit confidence in the bearish outlook for the AUD, aligning with the desk's sentiment while contrasting with more optimistic views from Deutsche Bank. Conversely, firms like Barclays and BofA show a more tempered approach, predicting higher targets for AUD/USD than the desk's current positioning suggests.
As the EUR/USD remains sensitive to German economic data and ECB sentiment, traders should also monitor the USD/JPY movements for potential correlation and spillover into broader market dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The USD is rallying due to equity market instability and hawkish Fedspeak.
- 02Tech sector sell-offs are negatively impacting risk-sensitive currencies like AUD and NZD.
- 03The EUR faces downward pressure from weak German PMIs amidst a less hawkish ECB outlook.
- 04Near-term USD strength is difficult to ignore, despite concerns of medium-term dovish reversals from the Fed.
Market implications
Traders should keep a close watch on the 1.1400 level in EUR/USD, which has implications for market sentiment in response to any further economic releases. Monitoring the tech sector for signs of stabilization could also influence currency momentum, particularly for the AUD.
Risks to this view
Should the Fed signal a shift towards dovish policies or actual rate cuts, this could weaken the USD. Additionally, any unexpected improvements in risk sentiment could lead to a rapid turnaround in the dollar's recent strength, requiring re-evaluation of long USD positions.
AUD/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Deutsche Bank | Bullish | 0.7200 |
BNP Paribas | Bearish | 0.6800 |
UBS | Bullish | 0.7300 |
Articles FX Daily: AI jitters add fuel to USD rally 08:08 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Equity turmoil is adding to the dollar’s strong momentum, which is also benefiting from hawkish Fedspeak. The ECB’s Lane tried to readjust communication on the hawkish side after Lagarde’s comments on Monday, but poor German PMIs aren’t helping the euro’s case. In Australia, hot core inflation points to a hawkish RBA, even if we don’t expect any more hikes Francesco Pesole and Frantisek Taborsky Safe havens like USD are outperforming USD: Hard to pick a top The tech-led equity sell-off has started to significantly spill over into FX.
Since the sentiment jitters originated in Asia and are centred on semiconductor stocks, the Aussie and Kiwi dollar have been hit hard, alongside SEK and NOK, which tend to underperform as liquidity dries up in risk-off conditions. The canonical safe havens USD, JPY, CHF are doing well, but only one – the dollar – can also offer an attractive domestic story from a growth and carry perspective. Whether this is a moderate correction in a stellar year for AI stocks or the start of a more prolonged equity downturn, USD should outperform while risk aversion holds.
In the latter scenario, however, a potential dovish repricing in the Fed curve – if met with actual easing – could leave the greenback much weaker in the medium term. US and Europe’s equity futures are stabilising this morning, suggesting consolidation may be more likely than another major leg higher in the dollar. But for now, we remain very cautious about picking a top in this USD move.
We still don’t think this is the start of a new bullish USD cycle, but near-term momentum remains bullish. Fespeak has also added support, with the generally neutral FOMC member Austan Goolsbee saying yesterday that inflation is too high and going the wrong way. Francesco Pesole EUR: Eyeing 1.130 The equity sell-off primarily drove yesterday’s EUR/USD drop, but PMIs also did little to challenge the narrative of diverging US-EU growth.
While US surveys got a small bump from the Middle East de-escalation, Germany’s service PMIs dropped from 48.1 to 46.8, dragging the composite further into contraction territory. That clouded an otherwise decent read for the eurozone, where the composite PMI at 49.5 is close to returning to expansion. On the positive side for the euro, ECB Chief Economist Philip Lane sounded quite hawkish, warning that inflation is set to stay above 2% for some time.
This looks like an attempt to push back against President Lagarde’s dovish messaging on Monday, with Lane perhaps better reflecting current Governing Council consensus. There’s a good chance we’ll hear more ECB members offering a more hawkish stance for that reason. Still, the EUR:USD two-year swap rate differential is now at the widest since September.
Sources & References
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