This has been a great week for the dollar so far, with both the Federal Reserve and politics working in the currency's favor. While the rally was initially sparked by Federal Reserve Chair Yellen's indication that more interest rate hikes were likely, the dollar has also benefited from the revelation of Trump's plans for tax reforms. While initial reactions to his plans were far from uniformly positive, markets are being forced to price in the possibility of substantial tax cuts and the repatriation of billions of dollars held overseas by US corporations. As we have highlighted in various articles, investors remain extremely short the dollar, so sentiment is also working in the currency's favor.
Given rising rate hike expectations, USD/JPY has been strong this week, with the exchange rate currently trading just under 113. The pair began the week below 112. The euro continues to disappoint, with EUR/USD now trading below 1.1740. The pair began the week closer to 1.1950.
Economic announcements this week have been mostly positive. While US house price growth continues, housing sales have been disappointing. Looking at the broader economy, durable goods orders have been very strong, thanks to larger-than-expected aircraft orders. On September 28, we'll see the announcement of annual GDP and GDP deflator figures, along with initial jobless claims. Expectations for GDP growth remain high, and can have a significant impact on the dollar if actual results miss expectations. 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.