Worries about artificial intelligence did not stop the dollar; What is the market waiting for?

Source link: Worries about artificial intelligence did not stop the dollar; What is the market waiting for? At a glance, strong US inflation data continues to support short-term interest rates; Therefore, ING does not see any signs that the dollar is ready for a serious decline at the moment. Concerns about the debt of artificial intelligence companies have increased interest in US Treasuries; An indicator that can become more important if the correction of technology stocks intensifies. EUR

Strong US inflation data continues to support short-term interest rates; Therefore, ING does not see any signs that the dollar is ready for a serious decline at the moment.

Concerns about the debt of artificial intelligence companies have increased interest in US Treasuries; An indicator that can become more important if the correction of technology stocks intensifies.

EURUSD may rally to the 1.1340-1.1350 range, but ING does not expect the pair to necessarily outperform a broader correction in US equities.

Financial markets calmed somewhat after CoreWeave shares bounced back on Thursday; But the disagreement between the two narratives continues: on the one hand, the intensification of price pressures may require a tighter (hawkish) monetary policy, and on the other hand, the reform of the technology market may push the outlook for monetary policy to ease. Today, forex markets are expected to fluctuate more in recent ranges and more attention will be paid to domestic developments in countries, including the problems of the Indonesian stock market.

This report of Ambassador Arjan was prepared based on the analysis published on the ING website and translated and rewritten for the Persian speaking audience.

USD: What does a steeper yield curve mean?

Some of the selling pressure on its assets was offset in yesterday's trading after Nvidia CEO Jensen Huang's comments about CoreWeave's financial condition improving and the company's cost of funding falling. Of course, considering that Nvidia is one of the important shareholders of CoreWeave, such statements are not so surprising. It remains to be seen how long this return of prices will continue.

The most important development this week has been the improvement in the performance of the long-term sector of the US Treasury bond market; That too in a situation where inflation data is still high. Investors appear to be finding value in longer-dated Treasuries, seeing them as a relative hedge against a potential AI-related trade correction. If the selling pressure in tech stocks intensifies, the buying of Treasuries may extend to shorter maturities.

Despite rising concerns about a possible AI market correction, inflation data remains strong. Yesterday, the US producer price index for September came out much higher than expected. Today, the price of American imports is expected to have increased by nearly 8% compared to last year; The highest rate since summer 2022.

Inflation data has supported short-term interest rates and this week caused the difference between two-year and ten-year US Treasury bond yields to decrease by about 20 basis points; In other words, the yield curve of these bonds has become less steep.

✔️ Read more: Varash, Federal Reserve Chairman: We will evaluate the situation in the October and December meetings

What does this situation mean for the forex market? Typically, the dollar outperforms active and emerging market currencies when the Federal Reserve tightens monetary policy and the outlook for economic growth diminishes. The dollar is usually poised to fall when short-term interest rates drop significantly; But we have not reached that stage yet.

Unless there is a sharp new wave of declines in AI stocks and other risk assets, ING's research team expects the dollar to stabilize near recent highs. Also, we still believe that the Swiss franc will have a better defensive performance in this situation. The DXY dollar index is likely to struggle to break through the 102.40-102.50 range, with support in the 101.75-101.80 range.

Euro: Is inflation in the euro area confirmed at the level of 3.8%?

Today's Eurozone data is expected to confirm September's inflation rate at 3.8%; A figure that is much higher than the 2% target of the European Central Bank.

Markets are still assessing the more contractionary inflation forecasts the European Central Bank presented at its September news conference. These forecasts have been one of the main factors in the formation of expectations for about 75 basis points of further increase in the interest rate of the European Central Bank.

However, ING's economic team predicts just one more rate hike. Developments in the French government bonds market will also play an important role in determining the extent of the European Central Bank's need for further interest rate increases.

The EURUSD currency pair is supported by this week's concerns about US AI stocks and may enter a relatively favorable phase for consolidation. This trend can push the price up to the range of 1.1340 to 1.1350.

However, if the US stock market corrects further, we do not expect EURUSD to be the strongest performer among currency pairs. From ING's point of view, the decline of the USDCHF, i.e. the weakening of the dollar against the Swiss franc, is likely to play a stronger role in such a situation.