The US dollar has now sold off for three days in a row. Last week, we warned that the dollar was looking overbought, and was vulnerable to a pullback. This week, major world currencies including the euro, the pound and the Chinese yuan are strengthening, and the dollar is falling in relative terms. The euro gained yesterday after the ECB's Lautenschlaeger suggested that the time has come to put unconventional tools (i.e. quantitative easing) back in the box. Following China's 'golden week' holidays, the yuan is strengthening against the US dollar. Given the importance of the upcoming 19th Party Congress, the yuan is likely to remain stable for now. There has been limited news headlines from the US given that Monday was a public holiday.
USD/JPY is back below 113, and is currently trading above 112.60 this morning. The euro has been rebounding since last Friday, and is currently trading above 1.1780.
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. 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.