Euro gains ground as AI jitters overshadow Fed rate hike bets

EUR/USD extends its recovery on Friday, trading around 1.1255 at the time of writing, up 0.32% on the day. The Euro (EUR) continues to strengthen against the US Dollar (USD), rebounding from a 16-month low of 1.1113 reached on Wednesday. The recovery is mainly supported by renewed weakness in the Greenback amid concerns surrounding the Artificial Intelligence (AI) sector and a broader reassessment of risk in global financial markets.

The US Dollar Index (DXY), which measures the Greenback's performance against a basket of six major currencies, trades around 101.65 after reaching an intraday low of 101.58. The index retreats significantly from its yearly high of 102.94 recorded earlier this week, providing additional support to EUR/USD.

The US Dollar's decline comes as investors reassess valuations and growth expectations in the AI sector, triggering selling pressure across financial markets. This shift in sentiment appears to be weighing on the US currency, despite a macroeconomic environment that remains broadly supportive of higher US interest rates.

Indeed, the latest US inflation figures, released earlier this week, exceeded market expectations, highlighting persistent price pressures above the Federal Reserve's (Fed) 2% target. Rising energy costs, partly driven by the ongoing conflict in the Middle East, continue to complicate the inflation outlook and reinforce expectations of further monetary tightening.

Geopolitical tensions remain an important source of uncertainty. Negotiations between the United States (US) and Iran remain deadlocked, while tensions between Saudi Arabia and Yemen's Houthi movement continue to escalate. These developments raise concerns about potential disruptions to energy supplies, which could sustain inflationary pressures in the coming months.

Against this backdrop, investors increasingly anticipate another interest rate increase by the Fed before the end of the year. Speaking in Bangkok on Friday, Fed Chair Kevin Warsh maintained a cautious approach to monetary policy communication, avoiding any commitment regarding upcoming decisions. "I don't prejudge meetings," Warsh said, emphasizing the central bank's reluctance to provide explicit forward guidance.

According to the CME FedWatch tool, markets currently assign a 15% chance to an interest rate increase in October, compared with an 89% chance of a hike in December.

This divergence between the US Dollar's short-term weakness and expectations of tighter monetary policy could limit the EUR/USD recovery. While concerns surrounding the AI sector currently favor the Euro, persistent inflation and the prospect of higher US interest rates remain potential sources of support for the Greenback.

EUR/USD technical analysis

In the one-hour chart, EUR/USD trades at 1.1253, holding above both the 100-period and 200-period simple moving averages (SMAs) at 1.1194 and 1.1204, which reinforces a bullish near-term bias. The pair is also comfortably above nearby horizontal support at 1.1215, while the Relative Strength Index (14) at 63.8 stays in positive territory, suggesting sustained upward momentum rather than overbought exhaustion at this stage.

On the topside, immediate resistance emerges at 1.1270, with a subsequent hurdle at 1.1312, where a break would open the way for a more extended advance. On the downside, initial support is seen at 1.1215, followed by the 200-period SMA at 1.1204 and the 100-period SMA at 1.1194, ahead of deeper structural floors at 1.1150, 1.1100 and 1.1050, which should limit any corrective pullbacks while the broader bullish tone persists.