Dollar Recovers as AI Rally Lifts Global Markets

EUR/USD slipped toward 1.1500 during early Asian trading on Friday as the Euro came under pressure amid renewed risk aversion and concerns over an expanding conflict in the Middle East. Investors are also awaiting the Eurozone’s preliminary July HICP inflation data and the US Michigan Consumer Sentiment Index, both due later in the session.

Iranian Parliament Speaker Mohammad Bagher Ghalibaf said on Thursday that the United States would “pay the price” for the killing of Iranian civilians, while Saudi Arabia and 13 other countries announced plans to form an international coalition aimed at safeguarding freedom of navigation through the Bab al-Mandeb Strait, the Red Sea and the Gulf of Aden. The developments have increased concerns over a prolonged regional conflict and continued to weigh on risk-sensitive assets, including the Euro.

The Federal Reserve kept interest rates unchanged at its July meeting, while Fed Chair Kevin Warsh offered limited guidance on the outlook for future policy adjustments. The lack of clarity has added to uncertainty around the US rate path. Markets are now pricing in a 63.4% probability of a September rate hike, down from around 77% before the July Fed meeting, according to the CME FedWatch Tool.

Gold remained under pressure during early Asian trading on Friday as the precious metal faced renewed selling pressure as the US Dollar rebounded from a one-and-a-half-month low, while rising geopolitical tensions and renewed expectations for Federal Reserve rate hikes weighed on demand for the non-yielding asset.

US economic data released on Thursday initially pressured the Dollar and supported Gold. The US economy grew at an annualized 1.5% in the second quarter, slowing from 2.1% in the previous quarter and falling short of expectations. Meanwhile, headline PCE inflation declined 0.1% in June, marking its first monthly drop since April 2020, while the annual rate eased to 3.7% from 4.1%. Core PCE inflation, the Fed’s preferred measure, also moderated to 3.3% annually from 3.4%.

However, renewed tensions between the US and Iran have brought inflation concerns back into focus. Continued uncertainty around energy supplies and volatile crude oil prices could put renewed upward pressure on inflation, potentially encouraging the Fed to maintain a more hawkish policy stance. The US military said it had completed a new wave of strikes against Iran following missile attacks on US forces in the Middle East.

Attention now turns to the University of Michigan Consumer Sentiment and Inflation Expectations data for fresh signals on the US economic outlook. Technically, XAU/USD remains within a multi-week trading range, leaving the precious metal vulnerable to further losses unless a fresh catalyst triggers a decisive breakout.

Crude oil prices moved lower on Friday, with Brent falling around to $85 per barrel and West Texas Intermediate (WTI) declining about $81.50. Despite the latest pullback, both benchmarks remained on track for monthly gains of as geopolitical tensions in the Middle East continued to support prices.

The decline came as increased flows through key maritime chokepoints helped ease some supply concerns. The Strait of Hormuz, which normally carries around one-fifth of global crude oil and liquefied natural gas shipments, remains a major focus for energy markets amid the ongoing US-Iran conflict. Signs that tanker traffic is continuing through the waterway have helped offset some of the geopolitical risk premium.

Meanwhile, Saudi Arabia is seeking to establish a multinational maritime defence coalition to strengthen security around the Bab el-Mandeb Strait, the Red Sea and the Gulf of Aden. Fourteen countries, including Djibouti, Egypt, Pakistan, Sudan and Turkey, have expressed support for the initiative. However, Iran-aligned Houthi militants have threatened the Red Sea route by declaring a naval blockade against Saudi Arabia, adding to concerns over alternative energy supply routes.

Although tanker traffic has continued through both the Strait of Hormuz and the Red Sea, elevated security risks have pushed up freight and insurance costs, keeping a significant geopolitical premium embedded in oil prices. While crude has retreated from its recent highs, the broader outlook remains supported by continued supply disruption risks and heightened tensions across the region.

US stocks ended sharply higher on Thursday, with the US Tech 100 surging 3.28%, marking its strongest daily performance since June 15. The US 500 gained 1.49% while the US 30 advanced 1.09%.

The rally was driven largely by Microsoft, which jumped 15.41% after reporting stronger-than-expected quarterly results and maintaining its 2026 capital expenditure outlook. The results eased concerns that massive AI infrastructure spending could weigh on profitability and helped revive demand for technology stocks. By contrast, Meta plunged 8.0% after raising the lower end of its 2026 capital expenditure forecast, highlighting diverging investor views on the returns from heavy AI investment.

The broader market also received support from softer-than-expected US inflation data. Core PCE inflation, the Federal Reserve’s preferred measure, rose 0.1% month-on-month in June and 3.3% annually, while headline PCE prices declined 0.1% on the month and increased 3.7% year-on-year. The data, alongside signs of slower economic growth, reduced some concerns over an immediate need for tighter monetary policy.

Meanwhile, the Federal Reserve kept interest rates unchanged at 3.50%-3.75% for a fifth consecutive meeting on Wednesday. Fed Chair Kevin Warsh described the decision as a detailed assessment of persistent inflation, economic shocks and the appropriate policy response, while avoiding clear guidance on the timing of future moves.

Despite the strong gains in technology stocks, market breadth remained mixed, with several sectors declining. Attention now turns to upcoming earnings from Amazon and Apple, as investors continue to assess whether elevated AI spending can translate into sustainable earnings growth.