Stronger GDP and hawkish ECB signals fail to halt euro retreat

• A recovering Greenback pulls EUR/USD back from its intraday highs.
• Sticky inflation sustains the Fed’s hawkish stance as concerns over AI spending unsettle investors.
• The Euro struggles to retain support from robust Eurozone GDP figures and hawkish ECB remarks.

EUR/USD trades near 1.1140 at the time of writing. Having touched an intraday high of 1.1214, the pair reverses its earlier gains on Friday as the US Dollar (USD) recovers against a backdrop of increased financial market volatility.

A second day of losses in technology shares initially weighed on the US Dollar on Friday. Investors continued to assess disappointing earnings and question the returns from substantial AI investment. As the equity sell-off fuelled demand for government bonds, US Treasury yields declined, putting pressure on the Greenback.

After dropping to 101.53, the US Dollar Index (DXY) rebounded above 102.00. The index measures the Greenback against a basket of six major currencies. Further US Dollar losses remain limited by elevated inflation risks: developments in the Middle East have lifted energy prices, keeping the Federal Reserve (Fed) on a hawkish course.

Inflation remains persistently above the Fed’s 2% target, according to the latest US PCE figures. Meanwhile, third-quarter GDP growth exceeded expectations, giving policymakers greater scope to increase interest rates without putting the expansion at immediate risk.

Traders nevertheless worry that weaker AI spending could undermine growth, even though the ongoing investment boom is adding to inflationary pressures. On Friday, Richmond Fed President Thomas Barkin said that “the AI investment surge has pressured supply chains, and that is inflationary.” He also described AI investment as a source of demand-driven inflation that the Fed can counter.

A December rate increase remains traders’ favoured outcome, with a probability of around 75% indicated by the CME FedWatch Tool. On Wednesday, the US central bank kept rates at 3.75%-4.00% and reiterated its commitment to price stability. Barkin also noted that “the Fed has signaled a gradual approach.”

For the Euro, neither solid growth figures nor hawkish European Central Bank (ECB) remarks have delivered sustained support. Friday’s preliminary data put third-quarter Eurozone GDP growth at 0.4% QoQ, above the 0.2% forecast but below the previous quarter’s 0.6%. On an annual basis, growth increased from 1.2% to 1.3%.

Following Thursday’s ECB decision to hold interest rates steady, policymaker Fabio Panetta said on Friday that “further increases in policy rates could prove necessary.” With inflation expected to stay above 2% for several quarters, he added that the “outlook for prices is worsening,” and cautioned that the “increase in core inflation could become more pronounced early next year.”