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Mixed US megacap earnings have put the AI trade behind US exceptionalism under question, knocking the dollar lower and leaving the pound to test its 100-day average.
The dollar slipped overnight as mixed results from US technology giants put the AI trade under fresh scrutiny, and the Pound to Dollar exchange rate holds the gains at 1.3396 on Thursday.
The AI investment boom is the key driver of US exceptionalism, the outperformance in growth, earnings and asset returns that draws foreign capital into the US and lifts the dollar with it.
When that exceptionalism is questioned, the capital stops arriving, which makes a risk-off episode centred on US equities a sizeable headwind for the dollar rather than the support it would be in a selloff that started elsewhere.
“USD slipped to around 101.5pts in the Asia session as mixed US megacap earnings weighed on risk appetite,” says Carol Kong, Currency Strategist at Commonwealth Bank of Australia, adding that the dollar fell most against the yen and franc.
Meta traded higher after its results while Tesla fell back, and the same theme sank the Kospi by 2.6% in Asia, with futures pointing to declines in Europe and the US.
“Post-market trading was characterized by the market’s increased focus on technology companies’ investments, or rather how earnings development relates to an expected cost increase for capex,” says Marcus Widén, Economist at SEB.
Widén traces that cost increase directly to the autumn’s rise in interest rates, which raises the bar for AI capital spending to pay off.
“Mixed megacap earnings weigh on sentiment, with the artificial intelligence trade facing renewed scrutiny,” says a morning note from Julius Baer, the Swiss private bank.
MUFG said in a recent update that the AI trade is approaching an inflection, with rising risk premia in data centre stocks and a 20% fall in Coreweave shares among the margin changes it is tracking.
Credit Agricole set out the mechanism last week: foreign investors cutting exposure to US technology stocks also cut their dollar exposure, eroding the currency’s haven appeal, and the bank has reworked its “dollar smile” into a “smirk” to reflect it.
This is the second time in a week the pattern has played out, after the mid-October AI selloff pulled the 10-year Treasury yield from 5.32% to around 5.05% and lifted the pound through 1.33.
Oil Keeps a Floor Under the Dollar
Brent crude climbed 1.5% to near $110.5 a barrel after the US ordered non-emergency staff out of Saudi Arabia over the Houthi threat, which limits how far the dollar can fall.
“AI jitters have eased, shifting focus back to oil,” says Sim Moh Siong, FX Strategist at OCBC, in a note titled “Relief, Not Resolution”.
Higher oil lifts US inflation expectations and keeps Federal Reserve hike pricing alive, which is why the dollar’s pullbacks have stayed shallow through October.
Sterling has its own support after Wednesday’s UK inflation data, which showed an energy-driven rise that Julius Baer says makes a Bank of England insurance hike to 4.00% on 5 November more likely.
“Rising carry and an improved growth backdrop also strengthen the GBP outlook despite fiscal risks surrounding the autumn budget,” says Julius Baer.
The Swiss bank says it had rightly resisted calls for Bank of England tightening this year but now sees the data justifying a move.
UK public debt passed £3 trillion ahead of the 28 October Budget, which is the pound’s own risk to a recovery.
Our house view is that the pound stays capped into the Budget and recovers afterwards.
The pair now sits on its 100-day moving average at 1.3389, with the 21-day average at 1.3265 rising beneath it as support.
“Given the increasing upward momentum, there is scope for GBP/USD to rebound toward the top of the daily Ichimoku cloud, currently at 1.3480,” says Quek Ser Leang, Technical Strategist at UOB.
Quek says a breach of 1.3285 would indicate the pair is more likely to range-trade than continue to recover.
A daily close above the 100-day average opens 1.3480, with 1.3506 the ceiling beyond that.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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