We have seen interesting movements in currency markets last week. First, emerging market currencies fell under heavy pressure both versus the EUR and the USD. Second, with some delay, currencies with lower liquidity and commodity sensitive currencies also fell under pressure. This shows an increased level of risk aversion. At the same time, EUR/USD continues to be driven by 2-year interest rate differences. This signals that there may be risk aversion in parts of the FX market, while in other parts other drivers dominate. Going forward we expect US economic data to outpace eurozone data and the ECB to dampen eurozone interest rate expectations. This combination will support the USD as cyclical currency and interest rate sensitive currency (with high positive correlations to both interest rates and the Dow Jones) and hurt the euro as interest rate sensitive currency. As a result, EUR/USD will head lower. Our forecast of 1.25 at end-September may look stretched but once the move begins it is quite possible.