he relentless sell-off in equities worldwide and rising risk aversion did not benefit the US Dollar, which fell against every G10 currency, save the Canadian Dollar and, even more unusually, most emerging market currencies outside the Pacific Rim. The Yen predictably benefited from market nervousness as a safe-haven, but so did the Turkish Lira, the South African Rand and the Brazilian Real, all of them buoyed by market-friendly political developments.

In the absence of key macroeconomic or monetary policy news this week, we expect markets to remain focused on the interaction between US interest rates, risk assets, and currencies. The unusual divergence between the US Dollar and higher US rates, if confirmed over the next few weeks, would be a critical development.

This week’s EU summit, seen as the deadline for an exit agreement to be reached, will also be critical as far as Brexit is concerned. Should an agreement failed to be reached there is the possibility that an emergency summit is called for November in order to iron out a deal.

Major currencies in detail

GBP

Sterling was buoyed last week by hopeful rumors from the Brexit negotiations. The Pound did, however, give up almost all of its weekly gains in early Monday Asian trading following the news that the UK and the European Union could miss the key Brexit deadline. Discussions between Brexit Secretary Dominic Raab and EU chief negotiator Michel Barnier, intended to reach a breakthrough on a number of key unresolved issues, ended in deadlock over the weekend.

In addition to the Brexit negotiations, wage data out on Tuesday and UK inflation on Wednesday will add key information to predict the timetable for Bank of England rate hikes.

EUR

Eurozone economic developments continue to be overshadowed by the conflict over the right-populist Italian government and its plans to ignore Brussels budget deficit guidelines.

It is worth noting, however, that industrial production numbers came out much stronger-than-expected, and there is little sign of a slowdown in recent economic releases. Nevertheless, the Italian impasse could prove negative for the common currency ahead of the 15th October deadline for Italy to send its budget to the European Commission.

USD

The inability of the US Dollar to rally in spite of the general flight from risk and stock market sell-off was remarkable. This is more so because US rates really did not fall nearly as much as one would have expected given the falls in equities and the sharp disappointment in September inflation data out of the US. The latter showed a dramatic fall in headline inflation from 2.7% all the way to 2.3%, and a less dramatic but possibly more meaningful 0.1% downward surprise in core inflation.

Retail sales on Monday will provide the main macroeconomic reference this week. Even more important will be to monitor whether the US Dollar continues to ignore high US rates and rising risk aversion and fails to rally.