USD Still Soft on Monday

The US Dollar starts the week on a softer footing as last week’s uncertainty around AI-company debt levels remains a key threat to the hawkish Fed picture. AI stocks were seen plunging last week, dragging US stock markets lower, as questions arose over AI funding levels and the prospect of AI investment having hit a wall. The surge in AI spending this year has been a key driver of the bullish outlook on growth and inflation with the Fed acknowledging its role as a driver of price pressures. Consequently, the emerging view that AI spending might have peaked presents a question mark over the market’s hawkish Fed outlook. At the very least, a sharp downturn in stock markets creates a difficult backdrop for the Fed to tighten against. Indeed, if this narrative remains in place and stocks continue to push lower, this could start to have a stronger impact on Fed tightening expectations, putting USD at risk of a more meaningful correction lower.

Light Data Week

Looking ahead this week, the US data calendar is light and with the Fed in its pre-FOMC blackout period the market will be short of drivers. As such, focus will remain on the AI story for now with any further downside in stocks likely to weigh on USD. Updates on the Middle East as well as Trump’s peace efforts between Russia and Ukraine will also be watched. For now, the outlook remains skewed towards consolidation and a light grind lower though this could change in response to any breaking news.

Technical Views

DXY

The rally has stalled for now ahead of the 103.20 level with price now retesting the 101.91 level. If bulls can hold this level, focus will remain on 103.20 as the next target. Below here, retest of trend line support and the key 100 level will be the next targets to note.