Pound Slips as AI Stock Jitters Complicate Fed Rate Outlook

The British pound traded slightly lower on Monday, while the euro also lost ground, as stock market volatility linked to the artificial intelligence sector complicates the outlook for the U.S. dollar and Federal Reserve policy.

Currency Movements

In early trading, the pound sterling weakened against the dollar, with the GBP/USD pair down 0.11% to $1.3314, according to data from Investing.com as of 4:25 AM ET. The euro experienced a more pronounced decline against the greenback.

• The EUR/USD pair fell 0.31% to $1.1203, its lowest equivalent closing level since October 14.
• The euro also weakened against the pound, with EUR/GBP dropping 0.23% to 0.8414, approaching a 52-week low.

AI Jitters and Fed Expectations

Recent market moves appear to be driven by concerns over the high-flying tech and AI sectors rather than new macroeconomic data. According to Francesco Pesole, an FX strategist at ING, the U.S. two-year OIS/SOFR rate has fallen 25 basis points since the last U.S. CPI report, a move he described as "mammoth" and driven almost entirely by AI-related stock market jitters.

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This suggests that investors are pricing in a less aggressive Federal Reserve. "Markets appear to have a clear reaction function in mind: stock market turmoil is enough to drastically reduce Federal Reserve tightening plans, even with inflation running hot," Pesole noted in an analysis. With the Federal Open Market Committee (FOMC) in its pre-meeting blackout period, investors lack fresh guidance from policymakers.

Dollar Outlook and Broader Context

While the dollar's safe-haven appeal is being tested, analysts are hesitant to call the start of a major downtrend. Pesole suggested the dollar "may actually lag many other G10 currencies if stock market instability originates in tech/AI." However, ING's analysis indicates a December Fed rate hike remains a "likely outcome," with the dollar index potentially returning to the 101 level in the coming weeks.

The euro faces its own headwinds, pressured by what Pesole described as "continued widespread protests" in France over the weekend, which could weigh on the country's stocks and bonds. The primary data point for the eurozone this week will be Friday's PMI figures, with a modest softening expected.