Yesterday was another very weak day for the dollar. At the start of the day, the dollar sold off after China strengthened the yuan by selling dollars and buying yuan in the open market. Dollar weakness continued as the euro rose on rising ECB-related hopes and Catalonia's move towards negotiations with Madrid. Finally, news headlines from Washington suggested that Trump was having difficulty getting enough votes in the Republican party to pass tax reforms. We have covered the latest catalysts for dollar weakness more deeply in a recent thought piece.
USD/JPY sold off yesterday and is flat this morning. The exchange rate is currently just below 112.40. Yesterday was a great day for the euro, with EUR/USD rising above 1.18. The exchange rate is currently just above 1.1820.
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. We published our broader thoughts on the upcoming FOMC minutes and CPI numbers in a recent article.
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.