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The US dollar fell through the first part of last week and lows for the year against several G10 currencies were set in the initial reaction to the rate cut by the FOMC. However, Chair Powell press conference and a look at the Summary of Economic Projections were not as dovish the rate cut and concerns about the deterioration of the labor market seemed to suggest. US yields rose and the dollar recovered, with new highs for the week seen ahead of the weekend. There appears to be scope for additional near-term modest US dollar gains. They should be understood as corrective in nature. 

Given that the thunder from PCE deflator has already been stolen by the CPI and PPI, and the dispersion of Fed views, the focus may not be so much on US data as the 14 (of 19) Fed officials who will be speaking next week, including Chair Powell on Tuesday, September 23. The preliminary September PMI may be more important for Europe than the US, Japan, or Australia, but the bar to another ECB rate cut seems high. The two hawkish dissents from the BOJ's decision to stand pat encouraged the market to nudge up the odds a hike this year to about 72% from about 62% at the end of last week. It is the highest since late August. And the small rise in the Tokyo CPI, the first in four months, may push on the open door. 

U.S.

Drivers: The dollar remains most sensitive to changes in US interest rates. Encouraged by the latest Summary of Economic Projections, the market has a rate cut fully discounted for next month and about a 75% chance of a cut at the December meeting as well. Yet, the pendulum has swung quite far, and until at least the next jobs report (Oct 3), it is hard to see the chances of a faster pace. As has often been the case, the market had one reaction to the Fed's statement and another to Fed Chair Powell's press conference. In the week ahead nearly 3/4 of Fed governors and regional presidents will speak. Keep in mind the wide dispersion of views. Powell speaks on Tuesday. 

Data: There are US economic reports due every day in the week ahead. Two reports stand out and they are both in the second half of the week. Thursday sees a slew of data at 8:30 ET and given the tariffs the advance goods trade figure will draw interest, and the following day, personal income, consumption, and deflators are due. If job growth has been dramatically overstated, it would seem to imply income would have also likely been exaggerated, the fuel for consumption. Personal income rose by an average of 0.4% a month in H1 25, the same as in in both H1 24 and H2 24. Personal consumption has slowed. It was flat in H1 25 after rising by an average of 0.2% a month in H1 24 and 0.4% in H2 24. 

Prices: The Dollar Index eked out a small gain last week to snap a two-week decline. It faces initial resistance in the 97.90-98.00 area. A move above 98.25 could spur a move toward 98.70. The momentum indicators look poised to turn higher. A break below 97.00 would call this constructive near-term outlook into question. 

EMU

Drivers: The US side of the equation continues to be the dominant force. Neither the fifth new French prime minister in two years, nor NATO shooting down Russian drones over Poland deterred the market from taking the euro to new multi-year highs. Putin and Trump suggested was it was a mistake that the drones entered Poland's airspace, and by that they seemed to imply an "innocent" error (Warsaw disagreed). British and French fighter planes were sent to help protect Poland's airspace. Estonia's airspace was violated before the weekend. With the market discounting nearly 50 bp of Fed rate cuts in Q4, a new development may be needed to get sentiment to swing further. Similarly, the US two-year premium over Germany fell to about 150 bp last week, down 50 bp since the end of July, but appears to have found a near-term bottom. Corrective pressures may also support the dollar. 

Data: The data highlights are Tuesday's preliminary PMI and Thursday's money supply and lending figures. The central bank has made it clear that the bar is high for another rate cut, so the data, which may not typically have much impact on the exchange rate, may have even less. 

Prices: The euro reversed lower during the Fed's press conference in the middle of last week after setting a new four-year high near $1,1920. It proceeded to weaken and reached about $1.1730 before the weekend. A break of the $1.1720-25 area could signal a move toward $1.1650-60. The momentum indicators appear set to roll over. 

PRC

Drivers: The PBOC continues to gently allow the dollar to fall against the yuan. That is a fact. The explanation for why seems to be guesswork. One idea that has been suggested it is some concession to help pave the way for a Trump-Xi summit later this year. This seems to make it seem as if China has the weak hand. Yet, it has demonstrated that with the current tariffs, it has replaced the lost demand from the US. Previously, the US seemed threatened by Chinese efforts to secure advanced US chip technology. Now it is frustrated that Beijing is deterring companies from buying the new Nvidia chip. China also has dramatically reduced its purchases of US energy and soy. Beijing appears to have found workarounds the US primary and secondary export controls. Beijing has also demonstrated its dominance of the rare earths supply chain. There does seem to be a conscious effort on the part of the US administration not to antagonize China right now. It has turned down a Taiwanese request for several hundred million dollars of weapons and Treasury Secretary Bessent explicitly endorsed the yuan's rise against the dollar this year (~2.5%) and suggested the exchange rate was more a problem for Europe. 

Data: There is little chance that the loan prime rates will be cut this week. The one-year rate is 3.0% and the five-year rate is 3.50%. They have been cut once this year, in May, by 10 bp. China reports August industrial profits next weekend. It is likely far too early to expect much sign of the campaign against over-investment. We have suggested the over-investment is a rational response to the access to patient bank capital and the formal and informal incentive structure of local governments (or officials).

Prices: The dollar recorded the low for the year against the offshore yuan in the middle of last week, near CNH7.1850. As the greenback corrected higher broadly, it recovered to approach CNH7.12 before the weekend. A move above the CNH7.1270 area would target the CNH7.15 area next. 

Japan

Drivers:  The exchange rate continues to seem more sensitive to changes in the US interest rates than the interest rate differential or Japanese rates. That said, October 3-4 may be the next key events. The former is when the US September employment report will be released, and the latter is the LDP leadership election.

Data: The local market tends not to react much to the PMI. For the record the composite PMI rose in three consecutive months through August, and at 52.0, it matched the high since last August. The market is more sensitive to Tokyo's CPI, due at the end of the week. It is reported several weeks ahead of the national figures but provides a robust signal. Tokyo's headline CPI has fallen for three consecutive months since August. It peaked in January and again in April and May at 3.4%. In August it was at 2.6%. The core rate, which excludes fresh food, also has fallen for three months and is at 2.5%. It finished last year at 2.4%. Both the headline and core are expected to have edged up in September. The two hawkish dissents at the BOJ's meeting last week that left rates steady boosted speculation of a rate hike in Q4. 

Prices: In the immediate reaction to the FOMC announcement and the drop in US rates, the greenback was sold to a two-month low near JPY145.50, near (50%) retracement of the dollar's rally from the year's low set in April (~ JPY139.90), before recovering smartly. The gains stalled in the JPY148.25-30 area, near the downtrend line connecting the August and September highs. The next technical target is the JPY148.65-85 area, though it is likely predicated on a continued rise in US rates. 

UK

Drivers:  The broad direction of the dollar, especially against the euro, appears to overshadow domestic British developments. Still, the exchange rate is also sensitive to changes in long-term UK interest rates, but in a different way than we suggested with the US dollar. In the UK, higher 10- and 30-year yields are inversely correlated with changes in sterling. 

Data: It is a light calendar week for the UK. The main feature is the preliminary September PMI. It is one of the bright spots. The composite PMI rose to 53.5 in August, the highest since last August. The larger than expected budget deficit reported last week underscores concern about the will likely grow ahead of Chancellor Reeves Autumn Budget in late November. 

Prices: Sterling's rally that began on September 3, near $1.3335, peaked last week on the FOMC decision near $1.3725. It reversed lower and was sold slightly below $1.3465 ahead of the weekend. It settled near session lows, and the momentum indicators are turning lower. Additional near-term losses are likely. Nearby support may be around $1.3430-35. A convincing break could signal a move back into the $1.3335-65 area. 

Canada

Drivers:The US dollar's general direction appears to be the most important factor for the Canadian dollar. But the Canadian dollar also seemed independently weak. The greenback bottomed against the Canadian dollar on June 16, a couple of weeks before the Dollar Index, the euro, or sterling set their extremes. From the following three months, the Canadian dollar has been the weakest of the G10 currencies, having fallen by about 1.2%. Yet ahead of the weekend, as the greenback strengthened, the Canadian dollar was the best performer, sufficiently so to take the top position among G10 currencies for the week, rising by about 0.50%.

Data: The data highlight comes at the end of the week in the form of the July GDP. Canada's monthly GDP contracted every month in Q2. The quarterly calculation showed a 1.6% contraction annualized. That expects explain why the Bank of Canada cut rates last week. The swaps market is discounting about a 55% chance of a hike next month and an 88% chance at the last meeting of the year in December. 

Prices:Short-term momentum traders appear to have gotten caught the wrong way, and the Canadian dollar recovered from the initial sell-off ahead of the weekend. The greenback initially rose and pushed to CAD1.3825, meeting the (61.8%) retracement of the leg lower from the September 11 high (~CAD1.3890). It reversed lower and fell to nearly Thursday's low (~CAD1.3765). A break of that area could signal a return the recent low near CAD1.3725. That, in turn, could be the neckline of a topping pattern, which if/when convincingly violated, could project back to the low for the year set in July near CAD1.3540. 

Australia

Drivers:  Although the Australian dollar and the Canadian dollar have gone in opposite directions this month, the rolling 30-day correlation is robust near 0.70, the lowest in almost two months. It is interesting that inverse correlation (30 days) of changes in the Australian dollar and the US dollar against the offshore yuan has been trending since early August from -0.80 to around -0.40. 

Data: The PMI tends not to elicit much of a reaction in Australia. Still, the composite PMI is risen sharply from 50.5, the low for the year in May, to 55.5 in August, the highest in at least three years. New orders are also at their highest level in at least three years. In the middle of the week, the August CPI print is due. After falling in May and in June, it jumped to 2.8% in July (from 1.9%). It was the highest since last July. The combination of the two helps explain why the market has retreated from its more aggressive outlook for the trajectory the monetary policy. The year-end rate implied by the futures market is near 3.30%, the highest in nearly four months.

Prices: The Australian dollar posted a key reversal last Wednesday by making a new high for the year (slightly above $0.6705) and reversing lower during Fed Chair Powell's press conference and settling below the previous day's low. Follow-through selling took it to around $0.6585 before the weekend. This overshot the (50%) retracement of the rally from the September 2 low (~$0.6485). The next target is the $0.6560-75 area, and then $0.6500-25. The momentum indicators are rolling over, lending credence to corrective view. 

Mexico

Drivers: The peso (and several other Latam currencies) offer attractive interest rate pick-up for dollar-based investors or for short-dollar carry-trades. Mexico's plan to hike the tariff on trade partners with no free-trade agreement (notably China, East Asia, and Russia) will help the negotiations with the US even if President Sheinbaum says that the tariffs are meant to protect domestic jobs. Mexico and Canada are also working toward closer ties. 

Data: There are two highlights in the week ahead. On Wednesday, Mexico reports CPI for the first half of September, and barring a significant surprise, the central bank will cut its overnight target rate a quarter-point to 7.50%, amid heightened concern about the trajectory of the economy and encouraged by the continued strength of the peso. The swaps market anticipates a terminal rate of 7.0%. We suspect it may be a little lower. 

Prices: The dollar recorded a new low for the year near MXN18.20 on the Fed's announcement and reversed higher, reaching almost MXN18.3450 before the day was over. Follow-through dollar buying saw it approach the week's high before the weekend a little below MXN18.47. A move above MXN18.50-MXN18.51 would strengthen ideas that a low is in place. The price action suggests some caution ahead the Banxico meeting. Near-term potential may extend into the MXN18.56-60 area. 

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