British Pound Poised to Snap 7-Week Losing Streak as AI Stock Fears Weigh on Dollar

The British pound is set to end a seven-week losing streak against the U.S. dollar, gaining traction on Friday as a pullback in the greenback was fueled by investor unease surrounding high-flying artificial intelligence stocks.

As of 5:55 AM ET, the pound was up 0.43% against the dollar at $1.3331, putting it on pace for a weekly gain of approximately 0.7%. This would mark its strongest closing performance since September 22. The euro also advanced, rising 0.29% to $1.1253, underscoring that the move was driven more by broad dollar weakness than by UK-specific factors.

Dollar Pressured Despite Hot Inflation

The U.S. dollar's decline comes amid signs of anxiety in the equity markets, particularly concerning the rally in AI-related stocks. According to Chris Turner, Global Head of Markets at ING, investors appear to be using long-term U.S. Treasuries as "an interim hedge for a correction in the AI trade."

This dynamic has pushed down long-end Treasury yields even as recent inflation data remains hot. U.S. producer price data for September came in significantly above expectations, according to ING. This has supported short-term yields, causing the 2-year to 10-year Treasury yield curve to flatten by nearly 20 basis points this week. "Unless we see another sharp lurch lower in AI stocks and risk assets in general, the dollar should be consolidating near the recent highs," Turner noted.

Mixed Picture for UK Economy

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While the pound's rally is primarily a dollar story, the UK saw some positive domestic news. The British economy performed better than expected in August, with strong growth in the computer programming sector offering evidence of an AI-related boost.

However, potential fiscal headwinds pose a risk. The Guardian reported that Chancellor John Healey plans to increase taxes on banks in his October 28 budget, with industry figures expecting the bank surcharge to revert from 3% to 8%. The Trades Union Congress (TUC) estimates this could raise an additional £2.25 billion annually. Separately, analysts cited by The Guardian noted that rising government borrowing costs could halve the £24 billion fiscal buffer set in March.

Market Outlook

Looking ahead, ING analysts expect the euro to enter a consolidation phase, with the potential for the EUR/USD pair to extend toward the 1.1340-1.1350 range. For the U.S. Dollar Index (DXY), ING sees strong resistance at the 102.40-102.50 level, with support around 101.75-101.80.

Turner suggested that a more significant downturn for the dollar would require a "discernible turn lower in short-dated rates, and we are not there yet." He also added that in the event of a deeper U.S. stock market decline, the Swiss franc would likely be a bigger beneficiary than the euro.