The US dollar fell against most of the major currencies last week, the notable exception being the Japanese yen. The greenback has trended higher against the yen, bolstered by the rise in US rates and equity market gains, including last week’s 2.2% rally in the battered MSCI Emerging Markets Index. The pound managed to eke out a minor gain of less than 0.1%. Sterling had been moving higher and reached its best level in two months on September 20.It was up 1.5% for the week before pessimism over Brexit returned with a vengeance. 

Broadly speaking, we expect the FOMC meeting on September 26 to re-focus attention back on the continued divergence, which on rates and growth, continue to favor the US. At the same time, the optimism that the US and China will work out a trade deal after the November elections and that a bottom in emerging markets, as an asset class, is at hand, seem misplaced. 

Dollar Index

After closing below important support near 94.00 on September 20, the recovery before the weekend helped neutralize the negativity. The MACDs and Slow Stochastics have not turned up, but they are poised to do so early next week. A move above 94.60, which houses a retracement objective and the 100-day moving average would lend credence to the favorable outlook. On the other hand, a break of the 93.65-93.70 area would signal a deeper and more protracted correction is unfolding. 

Euro  

The euro traded at its best level against the dollar since the June ECB meeting, briefly poking above $1.18. The euro surpassed but did not close above the initial retracement objective (38.2%) of this decline since reaching the high for the year in February near $1.2555. With the help of cross rate demand ahead of the weekend, the euro’s pullback was limited to about $1.1735. A move below $1.17, and ideally $1.1665 would suggest the upside correction is over. The more favorable sentiment toward Italian bonds, which has seen the Italian premium over Germany (10-year yields) narrow 60 bp since the start of the month will be tested as the government has until September 27 to share its fiscal and economic projections ahead of the formal budget presentation next month.