Euro could benefit as AI debt fears hit US markets, ECB signals 'a pause' on rate hikes

The euro edged back above the 1.12 level on the dollar yesterday and is now trading roughly flat for the week. Renewed fears over AI debt, a byproduct of the heavy borrowing needed to fund the data centre build-out at a time of high and rising interest rates, have contributed to a sell-off in global tech and chip stocks this week.

Interestingly, we see this as a potential bullish scenario for EUR/USD, given that the Euro Area is far less exposed to the AI investment boom than the US, and so has less to lose if the funding cycle turns.

Revised Euro Area inflation figures for September will be released this morning, though we do not expect it to be particularly market moving.

ECB officials have made it pretty clear in recent communications that they do not have an October hike in their base case scenario, not least given the lack of second round inflation effects and the surge in bond yields - that Lagarde herself has said justifies a pause.