The dollar has surged to a 19-year high, while a quarter of the UK's GDP growth, or 0.45 percentage points out of 1.8%, is attributable to artificial intelligence technologies. Germany has raised its 2026 economic growth forecast for the same reason, from 0.5% in May to 1.3%. If the boom comes to a halt, the global economy will lose not only this contribution but also the wealth effect generated by the rally in technology stocks. This is precisely why the US dollar is benefiting under any scenario, while EUR/USD is caught between two equally unfavorable outcomes.

Dynamics of the German Economy

The first scenario is currently unfolding. Easing concerns that the new Congress could impose restrictions on the artificial intelligence industry, combined with expectations of an accelerated Fed monetary tightening cycle, is supporting EUR/USD bears amid US exceptionalism. If Democrats were to restrict the industry, the risk of a global recession would increase, and the dollar would benefit as a safe-haven asset.

US consumer prices rose by 0.4% month over month in October, compared with the expected 0.3%, while the core indicator increased by 0.3% instead of the anticipated 0.2%. Speaking at a conference in London, Fed Governor Christopher Waller stated that he would support a 25-basis-point federal funds rate hike in December but would also consider a 50-basis-point increase if core inflation reached 0.3% or higher. It came in at exactly that level.

The futures market currently assigns a 90% probability to a 25-basis-point rate hike and a 10% probability to a 50-basis-point increase. Since the smaller move has already become the baseline scenario, the dollar needs stronger reasons to rise further, namely, expectations of a double-sized federal funds rate hike. A strong producer price index reading in the upcoming release or further hawkish remarks from FOMC officials could push Treasury yields and the dollar above their recent highs.

Changes in Market Expectations Regarding the Scale of Monetary Tightening

France's debt problems remain a negative factor for the euro. Ahead of the ECB's December meeting, the market is pricing in a 78% probability of a 25-basis-point deposit rate increase, but the central bank may not go further than that. Rabobank notes growing concerns among Governing Council members about the economic growth outlook. Uncertainty surrounding the electoral prospects of a far-right candidate in next year's French presidential election is also adding pressure on the currency pair. Rabobank expects the euro to weaken to $1.10 over the next three months.

For EUR/USD, this means facing pressure from two directions. The Federal Reserve could deliver a sharp policy move as early as December, while French political risks are likely to weigh on the currency pair gradually throughout next year, up to the presidential election.

From a technical perspective, the EUR/USD daily chart shows the development of an Expanding Wedge pattern. The rebound from 1.106 has created an opportunity for an upward correction. At the same time, a rejection at the resistance levels of 1.1135 and 1.115 could provide an opportunity to open or increase short positions.