FX Daily: Inflation vs. AI overbuild story dominates
The desk is framing the current FX landscape as one driven by heightened inflationary pressures juxtaposed against a potential correction in AI stocks. Per the full note , market sentiment has fluctuated as inflation remains stubbornly high, exemplified by a significant uptick in September PPI readings. With the 2-10 year Treasury curve flattening by nearly 20 basis points this week, the dollar is positioned well against major currencies as short-term rates remain anchored by persistent inflation indicators.
What the desk is arguing
The desk emphasizes that conflicting narratives regarding inflation and AI sector performance are shaping FX market dynamics. Recent comments from Nvidia's CEO about improved financials for Coreweave have sparked a modest recovery, but the underlying inflation data maintains pressure for tighter monetary policy, underscoring the dollar's strength.
Alongside this, the treasury market is showing signs of recovery, suggesting that investors find value in long-dated maturities while grappling with inflation risk. The implication is that as long as inflation rates remain elevated, the Fed will likely keep rates higher for longer, supporting the dollar against its peers.
Where it sits in our coverage
For the euro (EUR/USD), our consensus target sits at 1.1700, with a range from 1.1200 to 1.2000, while rabobank forecasts 1.1759 and socgen proposes a more bullish outlook of 1.2000 for December 2026. For the pound (GBP/USD), our consensus level is 1.3403, with bofa projecting a lower target of 1.3400 and morganstanley suggesting a high of 1.5100.
Expectations for the dollar's performance align with broader market consensus that anticipates continued strength against major currencies, particularly if inflation data remains elevated and the Fed maintains its hawkish stance. The current positioning reflects a belief in dollar appreciation against the backdrop of inconsistent growth forecasts linked to AI and inflation.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent inflation data shows sustained upward pressure, impacting the Fed's rate outlook.
- 02A nearly 20bp flattening of the US Treasury curve suggests shifting investor sentiment.
- 03The dollar remains favored against major currencies as inflationary signals persist.
- 04Localized stories, such as Indonesia's equity turmoil, might influence market volatility.
Market implications
Watch for the dollar to strengthen against the euro and pound if inflation data continues to exceed expectations, particularly as we navigate into the next month's reporting cycle. The current resistance level for EUR/USD is around 1.1300, with further advancements dependent on upcoming data releases.
Risks to this view
A sudden shift in tech sentiment or a significant correction in AI stocks could dampen investor enthusiasm for the dollar, prompting a quick pivot back to risk-on assets. If inflation data were to unexpectedly drop or Fed communication signals a dovish pivot, we might see a reversal of the current trend towards the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Barclays | Bullish | 1.2100 |
Bank of America | Bullish | 1.1500 |
UOB | Bearish | 1.1140 |
Articles FX Daily: Inflation vs. AI overbuild story dominates Published 07:36 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Financial markets have calmed a little after Coreweave stock bounced on Thursday. But the debate between intensifying price pressures needing tighter monetary policy and a tech correction requiring a softer policy outlook continues.
Expect more consolidation in FX markets today and more interest in local stories, such as Indonesia's equity travails Chris Turner , Frantisek Taborsky and Francesco Pesole FX markets remain caught between intensifying inflation and a re-pricing of AI risk USD: What does the flatter yield curve mean? The sell-off on Coreweave assets saw a modest reversal yesterday after Nvidia's CEO, Jensen Huang, said that Coreweave's financial strength was improving and its cost of capital was declining. Perhaps those comments should not be surprising from a major shareholder in Coreweave; let's see how long this bounce in Coreweave assets lasts.
The big takeaway this week has been the recovery of the long-end of the US Treasury market, even as inflation data continues to come in hot. Here it seems that investors are starting to find value in long-dated Treasuries and are viewing those as a middling hedge against a correction in the AI trade. Were the tech sell-off to gain momentum, that Treasury buying would move to the shorter end of the curve.
While fears of an AI correction may be growing, inflation data continues to come in hot. Yesterday it was US September PPI data blowing away consensus. And today, import prices should come in near 8% year-on-year, the highest since summer 2022.
Inflation data is keeping short-dated interest rates supported and has delivered a near 20bp flattening in the 2-10 year Treasury curve this week. What does that mean for FX? Typically, an environment where the Fed is applying the brakes while growth prospects are being revised down is good for the dollar against activity and emerging market currencies.
It is only when short end rates break lower that the dollar is ready to drop. And we are not there yet. Barring another big leg down in AI stocks and risk assets in general, expect the dollar to consolidate near recent highs.
We would continue to expect some defensive outperformance of the Swiss franc in this environment. DXY will probably struggle to get above the 102.40/50 area now, while support is 101.75/80. Chris Turner EUR: Inflation to be confirmed at 3.8% today Today's eurozone data should see September CPI confirmed at 3.8% – well above the European Central Bank's 2% target.
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