The dollar's round trip: a 2026 high, an AI-debt scare and a firmer pound
It was a week of whiplash in currency markets. The US dollar set a new high for 2026 on Wednesday, October 14, after a hotter-than-expected inflation report, and then gave all of it back within hours in Asian trading. Sterling was one of the main beneficiaries, helped by a surprisingly resilient UK economy and rising odds of a Bank of England hike. Here is what drove the swing and why it matters for the weeks ahead.
Why the dollar rallied, and then didn't
The first leg was textbook. September CPI came in at 3.7% against 3.6% expected, core inflation rose to 2.6%, and traders raised the odds of a Fed hike at the October 27–28 meeting. Higher expected US rates meant a stronger dollar, and the Dollar Index pushed to its best level of the year. It had already gained more than 4% over the past month.
The reversal was less obvious. Overnight, attention moved from inflation to credit stress in the AI sector. AI cloud provider CoreWeave lost nearly 17% in one session, and its longer-dated bonds were reported trading far below face value. Analysts at ING argued that the dollar was weakening because a credit scare centred on US technology could force the Fed to be less aggressive. In other words, the shock was coming from the US itself, so the dollar did not behave as a safe haven.
That is an important point for FX traders. The dollar tends to rally in a global panic, but when the stress originates in US assets and threatens the Fed's hiking path, the reaction can be the opposite.
Sterling: growth surprise and a likely BoE hike
The pound had its own reasons to climb:
GBP/USD climbed to about 1.3260 on October 15 and was trading near 1.3270 early on Friday, just under 1.33, after a hot US producer-price report (PPI +1.3% on the month) briefly gave the dollar some support again.
The rest of the board
Levels and events to watch
Bottom line: The dollar's direction now depends on which story wins: hot US inflation (dollar-positive through Fed hikes) or an AI credit scare (dollar-negative, because it threatens those same hikes). Sterling has the cleanest domestic story of the majors at the moment, with growth surprising to the upside and a BoE hike likely.
This article is for information only and is not investment advice.
It was a week of whiplash in currency markets. The US dollar set a new high for 2026 on Wednesday, October 14, after a hotter-than-expected inflation report, and then gave all of it back within hours in Asian trading. Sterling was one of the main beneficiaries, helped by a surprisingly resilient UK economy and rising odds of a Bank of England hike. Here is what drove the swing and why it matters for the weeks ahead.
Why the dollar rallied, and then didn't
The first leg was textbook. September CPI came in at 3.7% against 3.6% expected, core inflation rose to 2.6%, and traders raised the odds of a Fed hike at the October 27–28 meeting. Higher expected US rates meant a stronger dollar, and the Dollar Index pushed to its best level of the year. It had already gained more than 4% over the past month.
The reversal was less obvious. Overnight, attention moved from inflation to credit stress in the AI sector. AI cloud provider CoreWeave lost nearly 17% in one session, and its longer-dated bonds were reported trading far below face value. Analysts at ING argued that the dollar was weakening because a credit scare centred on US technology could force the Fed to be less aggressive. In other words, the shock was coming from the US itself, so the dollar did not behave as a safe haven.
That is an important point for FX traders. The dollar tends to rally in a global panic, but when the stress originates in US assets and threatens the Fed's hiking path, the reaction can be the opposite.
Sterling: growth surprise and a likely BoE hike
The pound had its own reasons to climb:
- UK GDP beat forecasts. The economy grew 0.1% in August when a 0.1% contraction was expected, after 0.4% in July. Annual growth reached 2.1%, the strongest pace since late 2022, and manufacturing rose 1.2% on the month.
- A BoE hike is coming into view. Most economists in a recent Reuters poll expect the Bank of England to raise Bank Rate to 4.0% in November, its first increase in more than three years. Stronger growth makes that easier to justify.
GBP/USD climbed to about 1.3260 on October 15 and was trading near 1.3270 early on Friday, just under 1.33, after a hot US producer-price report (PPI +1.3% on the month) briefly gave the dollar some support again.
The rest of the board
- EUR/USD bounced to about 1.1215, helped by the dollar's reversal, but French fiscal worries still cap rallies. ING sees a broader AI-driven correction as the euro's best chance of a recovery towards 1.13–1.135.
- USD/JPY keeps hovering around 158. The yen is not getting much haven support because US yields stay above 5%, and Tokyo has warned again that it is ready to step in.
Levels and events to watch
- GBP/USD: support at 1.3250 and then 1.3160; resistance at 1.3335 and the 100-day average near 1.3390. Société Générale flags 1.32 as the key pivot.
- Dollar Index: a sustained move back below the 102.40–102.50 area would confirm the reversal. A new 2026 high would put the Fed-hike trade back in charge.
- Fed Chair Warsh's speech (Friday, October 16): Any hawkish signal ahead of the October meeting could restart the dollar rally.
- AI credit headlines: Watch CoreWeave and other AI-linked bonds. Further stress could keep pressure on the dollar and help the euro and pound.
- Central bank week: The Fed (October 28) and ECB (October 29) meet back to back, with the BoE following in early November.
Bottom line: The dollar's direction now depends on which story wins: hot US inflation (dollar-positive through Fed hikes) or an AI credit scare (dollar-negative, because it threatens those same hikes). Sterling has the cleanest domestic story of the majors at the moment, with growth surprising to the upside and a BoE hike likely.
This article is for information only and is not investment advice.
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