The US dollar has been climbing this week, after trading sideways in the previous few weeks. Yesterday, the dollar rose alongside interest rates as Federal Reserve Chair Yellen highlighted the need to raise rates, but not too gradually. The dollar also rose against safe havens, such as the yen and gold, after Trump publicly thanked China for reigning in North Korea. China has recently forced its banks to break off all banking relationships with North Korean businesses and individuals. Markets are eagerly waiting for the Trump administration to announce its plans for tax reforms later today.
USD/JPY managed to rise above 112 yesterday, and is trading this morning closer to 112.70. The euro continues to falter after the German election results were announced last week, with EUR/USD falling below 1.18. The exchange rate is currently closer to 1.1740 today. GBP/USD is also falling, with the exchange rate near 1.3370.
This week has quite a few announcements relating to US housing and the health of the economy. We've seen strong Case-Shiller house price data (meeting 5.8% growth expectations), but weak new home sales (-3.4% vs. 3.3% expected) and consumer confidence close to expectations (119.8 vs. 120 expected). On Wednesday, we'll see build permits, durable goods orders and pending home sales. Thursday will see the announcement of annual GDP and GDP deflator figures, along with initial jobless claims. Finally, on Friday we'll see year-on-year Core PCE figures - the Fed's preferred measure of inflation in the economy.
We are upgrading the dollar index to bullish, following continuing momentum in the last week of September. The US dollar is gaining thanks to rising interest rate hike expectations and the revelation of Trump's tax reform plans on September 27. Looking at a daily chart of the US dollar index, the currency is now back to trading in normal conditions, having breached oversold conditions based on various technical indicators in early September.
For the first time in 2017, we are upgrading our medium-term outlook for the dollar to bullish. The dollar has been in oversold conditions since late June and is due for a rebound. The currency has been strengthening in the last week of September initially thanks to the Federal Reserve suggesting that another interest rate hike was likely later this year. This was followed by Trump's tax plan which was revealed on September 27, which has also led to dollar strength. While the currency remains oversold, we expect the dollar to re-enter normal trading conditions in the coming weeks.