After a fairly turbulent day last Friday, the dollar is rising sharply this morning. Previously, the dollar sold off after lower-than-expected inflation figures (Core PCE) and the White House denying rumors that Warsh was likely to become the next Chair of the Federal Reserve. Later in the day, Federal Reserve voting member Harker stuck to his calls for a December rate hike, helping the dollar climb. He specifically mentioned the strength of the labor market in his commentary. This morning has seen the dollar rise against interest rate-sensitive assets such as gold, bonds and the yen, suggesting that the market has increasing expectations of a December rate hike.
USD/JPY is now trading just below 112.90, having started the day below 112.50. The pair had gained above 113 last week. The euro is now back to selling off, with EUR/USD below 1.1770. The pair began the day above 118.00.
This week's data releases include a raft of survey, employment and durable goods numbers. Today we'll see Markit manufacturing PMIs. On Wednesday, we'll get both ADP jobs figures as well as Markit composite PMI and ISM non-manufacturing PMI data. On Thursday we'll see trade balance figures and factory orders. Finally, on Friday, we'll get the all-important non-farm payrolls figures and the unemployment rate. Last week saw better-than-expected GDP growth figures and worse-than-expected inflation (Core PCE) numbers.
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 in the medium-term, we expect the dollar to re-enter normal trading conditions in the coming weeks.