After falling yesterday, the US dollar is trading sideways this morning. Our short-term outlook on the dollar remains neutral. Looking at news, US interest rates rose yesterday following stronger-than-expected non-manufacturing and composite PMI data. Despite rising rates, the impact on the dollar was limited. Instead, currency markets have been focused on speculation regarding the next Fed Chair. Our take on the next Fed Chair discussion is that the role will ultimately have a limited long-term impact on the currency. DoubleLine's Jeff Gundlach, a notable bond fund manager, predicted that Neel Kashkari would be the future Chair, given his calls for lower interest rates and easier monetary conditions. This prediction was later denied by CNBC's Liesman, who claimed that the administration was not considering Kashkari for the role.
USD/JPY has been flat this morning, and is currently trading just below 112.80. Euro/dollar is also flat this morning, and is currently trading below 1.1750.
This week's data releases include a raft of survey, employment and durable goods numbers. On Monday, 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, ADP jobs figures met expectations, while Markit composite PMI and ISM non-manufacturing PMI data beat expectations (59.8 vs. 55.5). Today 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.
After hitting overbought levels earlier in the week, the US dollar has run out of steam. We are downgrading our outlook on the currency to neutral as a result. Earlier, the currency rose thanks to rate hike expectations following Yellen's last speech. Looking at a daily chart of the US dollar index, the currency is now overbought. Our analysis is based on various technical indicators.
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.