The pound sterling and the euro strengthened in trading on Friday (October 16) as pressure on the US dollar mounted, driven by investor concerns regarding artificial intelligence (AI)-related stocks in the US. Sterling rose 0.43% to US$1.3331, while the euro gained 0.29% to US$1,1253. The pound is also on track for a weekly gain of approximately 0.7%, potentially snapping a seven-week losing streak.
The dollar’s movement has been influenced by a recovery in the long-term US Treasury market. Investors appear to be using US government bonds as a hedge against a potential correction in AI stocks. However, the downward pressure on the dollar remains tempered; US Producer Price Index (PPI) data released on Thursday showed price pressures significantly higher than anticipated, and import price data—due for release on Friday—is also expected to show a sharp increase.
These conditions have kept short-term US yields elevated, narrowing the spread along the 2-year to 10-year Treasury yield curve. ING suggests that the Federal Reserve remains in a position to tighten policy to curb inflationary pressures. Consequently, the current weakness in the dollar is driven more by dynamics in the bond and tech-stock markets than by shifts in the UK’s economic fundamentals.
Domestically, the pound received a boost after the UK economy grew by 0.1% in August, defying expectations of a contraction. This growth was partly driven by an uptick in computer programming activity, signaling that the development of AI is beginning to contribute to the UK’s economic expansion.
Nevertheless, the UK’s fiscal outlook remains a risk for sterling. Plans to increase taxes on the banking sector ahead of the October 28 budget have drawn market attention, while rising yields on UK government bonds could constrain the government’s fiscal space. Such conditions may limit further gains for the pound if financing costs continue to climb.