It took the market a few days to overcome the shockingly poor non-manufacturing ISM (51.4 vs. 55.5). However, by the end of the week, the US dollar bulls had regained the upper end. The September Fed funds was implying a yield of 41.75 bp, up a quarter of a basis point from the September 2 close.
The US Dollar Index rebounded smartly off the trendline we have been monitoring. It is drawn off the May, June and August lows. It caught last week’s low of almost 94.45. Rebounding before the weekend, it stalled in front of 95.60, nearly meeting a retracement level of the pullback that began at the start of the month. A move above 95.60 targets the 96.15-96.25 area that contains the August 31 high and the 200-day moving average. Above there, the July high around 96.50 beckons.
The euro has fallen for the past four Fridays. It is an interesting pattern, but the significance is not clear. Compared with the beginning of this pattern, the euro is about a cent lower. On the week, the euro finished half a cent higher but had completely unwound the gains scored in response to the ECB lack of fresh action, even extending its buying program, despite the recognized downside risks and the (small) downgrades of the staff forecasts for next year’s growth and inflation.
A break of $1.12 could spur slippage toward $1.1150-$1.1170, but we suspect the euro will be supported by caution ahead of Fed’s Brainard and what is expected to be a softer US retail sales report. On the upside, congestion around $1.1250 may hinder strong gains, especially given the proximity of the FOMC meeting.