Despite a strong rally at the start of the day last Friday, the dollar ended down for the day. The buck fell following news reports suggesting another missile test from North Korea and non-farm payrolls figures. The impact from weak NFP figures was limited as the data was influenced by the hurricanes and thanks to comments from Federal Reserve voting member Robert Kaplan. Kaplan suggested that he was "open minded" regarding a December rate hike, despite weak job numbers. This morning, the dollar is flat relative to last Friday. As the dollar is now looking overbought in the short-term time frame, the currency is vulnerable to pullbacks.
USD/JPY is back below 113, and is currently trading above 112.60 this morning. The euro is rebounding since last Friday, , and is currently trading above 1.1730.
This week’s economic data releases include FOMC minutes on Wednesday, continuing and initial jobless claims on Thursday, and retail sales and Consumer Price Index figures on Friday. Note that US markets are closed on Monday for Columbus Day. Friday’s CPI figures will be watched closely, given rising inflation expectations. While the data will be influenced by the impact from the recent hurricanes, a sustained increase in inflation could suggest that the trend of weakening inflation in rate-of-change terms is coming to an end. As we wrote earlier, this has big implications for inflation-sensitive assets such as crude oil. Last week's non-farm payroll numbers widely missed expectations.
After reversing on October 6, we are downgrading the short-term outlook of the dollar back to neutral. The US dollar sold off following renewed concerns regarding North Korea. We previously warned that the dollar looked overbought in the short-term and remains susceptible to pullbacks. Looking at a daily chart of the US dollar index, the currency remains 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.