After hitting short-term overbought conditions earlier in the week, the US dollar is falling today. We downgraded our short-term outlook on the dollar to neutral accordingly. Looking at news, various agencies have reported that White House aides have delivered a shortlist of Federal Reserve Chair candidates to Trump. Betting markets are now more optimistic that Jerome Powell has a good chance of becoming the next Chair. Earlier, betting markets saw Warsh, a hawk, as the front runner. Given that Powell has called for lower rates and easier bank regulations, he is seen as more ideologically aligned with Trump. If Powell became the next Fed Chair, the dollar is likely to sell off on lower rate hike expectations.
USD/JPY has been selling off this morning, and is now just below 112.50. The euro bounced off 1.17 yesterday and is now trading above 1.1770.
This week's data releases include a raft of survey, employment and durable goods numbers. Yesterday we saw ISM manufacturing data beat by a wide margin (60.8 vs 58 expected). US manufacturing is very strong thanks to the rebuilding effort following Hurricane Harvey. 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.