American exceptionalism has been fueled by AI. Thanks to the artificial intelligence boom, the S&P 500 has delivered double-digit returns for four consecutive years, while the US economy has outperformed its global peers. However, a glitch in the system has dealt a blow to the US dollar. Let's examine what went wrong and develop a trading plan for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- Macroeconomic data continues to support the US dollar.
- Kevin Warsh offered little to unsettle EUR/USD bears.
- The decline in Treasury yields is linked to the AI boom.
- A rebound from 1.128 or 1.134 could present an opportunity to sell the EUR/USD.
Weekly Fundamental Forecast for Dollar
Retail sales are beating expectations, inflation continues to accelerate, and Donald Trump is discussing potential strikes on Iran after the midterm elections. On paper, these conditions should provide the perfect backdrop for a stronger US dollar. Yet the odds of a Fed rate hike in October remain low, while the EUR/USD continues to climb. What’s going on? Is Kevin Warsh the key to the puzzle, or is there more to the story than meets the eye?
US Retail Sales
Source: Bloomberg.
The US economy increasingly resembles a one-legged stool, with artificial intelligence providing its only real support. Massive investments in AI and emerging technologies are boosting GDP growth and fueling the narrative of American exceptionalism. This has helped underpin the US dollar's strength. However, intensifying competition from Chinese chipmakers and the resulting sell-off in the Nasdaq 100 have struck at the heart of the greenback’s rally.
The US Dollar Index suffered its steepest daily decline in more than a month as falling US tech stocks boosted demand for safe-haven assets and pushed Treasury yields lower. One factor behind the earlier rise in bond yields was the competition for capital from hyperscalers issuing corporate debt. When those companies came under pressure, investors shifted funds back into government bonds. Treasury prices rose, yields fell, and the dollar lost a key source of support.
US Dollar Daily Performance
Source: Bloomberg.
One might assume that the AI boom will continue indefinitely, but sooner or later, investors were bound to question whether their massive investments are delivering sufficient returns. Notably, these doubts have emerged on the eve of the third-quarter earnings season. If tech companies meet expectations, American exceptionalism could revive demand for the US dollar. If they disappoint, the consequences for the greenback could be far more severe. Deutsche Bank's warning that the greatest systemic risk to financial markets is not the French crisis but a loss of confidence in AI is therefore particularly telling.
As for Kevin Warsh, he has neither disappointed nor alarmed investors. True to form, the Fed Chair has offered no clues about the central bank’s next moves, leaving markets to speculate about what might change at the upcoming FOMC meeting. Investors are left searching for signals in market movements themselves.
Meanwhile, reports of AI's death are an exaggeration. The Nasdaq 100 and S&P 500 are unlikely to suffer a major correction, and Treasury yields should soon find firmer footing.
Weekly Trading Plan for EUR/USD
As a result, the strategy of selling the EUR/USD on a rebound from 1.128 or 1.134, or following a break below 1.121, remains valid.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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