The euro has cut through modest support at the May 2025 low and is now at the worst levels since April of last year.
The pressure is coming from the US dollar side of the equation as Treasury yields rise once again today. Fed hawk Beth Hammack pushed back against the idea of a 50 basis point rate hike but there is an increasing chorus at the Fed that rates need to rise to ‘restrictive’ levels and that they’re currently still in accommodative territory.
The takeaway is that two hikes won’t be enough and now the market is pricing in 85 bps of hikes in the year ahead. In addition, the market is wondering what they have seen to make them so alarmed. Some of that likely came through the latest CPI report, which saw a broadening of inflation pressures.
In terms of today’s price action, US 2-year yields rose 12 bps today to 4.85%. That’s up from 4.44% on November 6 and we’re now within striking distance of the September highs.
Meanwhile, the eurozone appears closer to the end of the rate hiking cycle with the market pricing in about 50 basis points in the year ahead.
Another important part of the dynamic is AI. Money is flooding into the US for AI investment opportunities and we’re seeing an uptick in AI trades. Today, CNBC reported that OpenAI raised $15 billion at a $1.25 trillion valuation. That’s a good sign for Anthropic ahead of next week’s IPO. The valuation range is said to be $1.25-1.75 trillion, and they’re widely seen as more-valuable than OpenAI.
If there’s a strong IPO, we could see an ebb in worries about neoclouds and AI capex in general. We saw some good news this week as CoreWeave jumped on earnings (though it has given back some today). Memory names have also rebounded.
Ultimately, this trade will come down to economic momentum and the market isn’t finding reasons to bet on Europe at the moment.
This article was written by Adam Button at investinglive.com.