Euro retreats despite stronger GDP and hawkish ECB signals

EUR/USD turns lower on Friday, giving up earlier gains as the US Dollar (USD) rebounds amid heightened volatility across financial markets. At the time of writing, the pair trades around 1.1140 after reaching an intraday high of 1.1214.

The US Dollar came under pressure earlier on Friday as technology shares fell for a second day, with investors still digesting disappointing earnings reports and questioning the returns on heavy AI investment. The sell-off drove demand for government bonds, pushing US Treasury yields lower and weighing on the Greenback.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, fell to 101.53 before recovering above 102.00. The US Dollar’s downside remains cushioned as higher energy prices linked to developments in the Middle East keep inflation risks elevated and the Federal Reserve (Fed) on a hawkish path.

The latest US PCE data showed that inflation remains stubbornly above the Fed’s 2% target, while stronger-than-expected third-quarter GDP growth gives policymakers more room to raise interest rates without immediately threatening the expansion.

However, traders fear that a slowdown in AI spending could weaken growth, even as the current investment boom adds to inflation pressures. Richmond Fed President Thomas Barkin said on Friday that “the AI investment surge has pressured supply chains, and that is inflationary.” He added that AI investment is creating demand-driven inflation, which the Fed can lean against.

Against this backdrop, traders continue to favour a December rate hike, with the CME FedWatch Tool putting the probability at around 75%. The US central bank held rates at 3.75%-4.00% on Wednesday, reaffirming its commitment to deliver price stability. Barkin also said that “the Fed has signaled a gradual approach.”

On the Euro side, upbeat growth data and hawkish European Central Bank (ECB) comments fail to provide lasting support. Preliminary figures released on Friday showed that the Eurozone economy expanded 0.4% QoQ in the third quarter, beating expectations of 0.2%, although slowing from 0.6% in the previous quarter. Annual growth rose to 1.3% from 1.2%.

After the ECB left interest rates unchanged on Thursday, policymaker Fabio Panetta said on Friday that “further increases in policy rates could prove necessary.” He added that the “outlook for prices is worsening,” with inflation seen above 2% for several quarters, and warned that the “increase in core inflation could become more pronounced early next year.”