Pound and Euro Weaken as AI Stock Volatility Tests Dollar's Haven Status

The British pound edged lower and the euro saw a more significant drop on Monday, as stock market volatility driven by the artificial intelligence sector caused investors to reassess the path of U.S. interest rates and question the dollar's safe-haven appeal.

As of 4:25 AM ET, the pound (GBP/USD) was down 0.11% to $1.3314. The euro (EUR/USD) fell 0.31% to $1.1203, its lowest level since October 14, after hitting an intraday low of $1.1182. Against the pound, the euro (EUR/GBP) also weakened by 0.23% to 0.8414, trading near a 52-week low.

AI Turmoil Shifts Fed Expectations

Recent instability in technology and AI stocks has significantly influenced interest rate expectations, even with inflation remaining elevated. According to analysis from ING, the U.S. two-year OIS/SOFR interest rate has fallen by 25 basis points since the October 14 consumer price index data was released.

Francesco Pesole, a foreign exchange strategist at ING, described this as a "very significant move" that was "almost exclusively driven by AI-related concerns, with little push from the macro side." He noted that the market appears to have established a clear pattern: "equity turmoil is enough to massively scale back Fed tightening plans."

Pesole added that if stock market instability is concentrated in the tech and AI sectors, the U.S. dollar "could actually underperform many currencies in the G10 space." However, ING clarified it does not believe this signals "the start of a major bearish dollar trend."

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Central Bank Outlook

With the Federal Reserve in its pre-meeting communications blackout period and a light U.S. economic calendar this week, market focus remains on rate speculation. ING analysts stated they do not expect policymakers to send a "dovish message" at the upcoming October meeting and believe a December rate hike is still "very much on the table."

Pesole suggested the Dollar Index could return to the 101 level in the coming weeks but sees limited further downside.

Meanwhile, the euro is facing additional pressure from political developments in France. According to ING, large-scale protests over the weekend could weigh on the country's stock and bond markets. The yield spread between 10-year French and German government bonds is currently hovering around 135 to 140 basis points. Key data for the eurozone this week includes PMI figures on Friday and the German ZEW Economic Sentiment index on Tuesday.