Sterling today: Pound set to snap 7-week losing run as dollar slips on AI fears

On Friday, the pound sterling surged as concerns over U.S. artificial intelligence-linked stocks prompted a dollar slump. The pound climbed 0.43% against the dollar, reaching 1.3331, while the euro also rose by 0.29% to 1.1253. Analysts predict the pound will continue its weekly ascent of around 0.7%, potentially ending a seven-week decline and achieving its best close since September 22.

Chris Turner, global head of markets at ING, attributes this to investors utilizing long-dated Treasuries as a buffer against potential AI trade corrections. Despite ongoing inflationary data, the long-end of the U.S. Treasury market has shown a recovery. The upcoming U.S. September producer prices and import prices are expected to reinforce this trend, with import prices projected near 8% year-on-year, the highest since summer 2022.

The pound's upward movement appears to be driven by broad dollar weakness rather than UK-specific factors, as the euro rose alongside it. Meanwhile, British economic data indicated a strong August performance, with a notable increase in computer programming jobs, suggesting AI's positive impact on growth. However, the fiscal outlook poses a risk, with Chancellor John Healey expected to introduce a 8% tax on banks during his Oct 28 budget, generating an estimated annual revenue of £2.25 billion.

Higher gilt yields and potential halving of the £24 billion fiscal cushion set in March could further impact the pound. Turner anticipates the Euro/Dollar exchange rate to enter a consolidation phase, potentially reaching 1.1340/50. The Federal Reserve's cautious approach to rate hikes is a key factor, with the dollar expected to struggle in breaking above 102.40/50. A further U.S. equity decline might favor the Swiss franc over the euro.