Yesterday was yet another down day for the dollar. Beyond news that Trump was having difficulty getting enough votes in the Republican party to pass tax reforms, the main story was regarding the next Fed Chair. Jerome Powell is now the most likely future Fed Chair, according to odds from betting markets. As we covered in our article on the next US Federal Reserve Chair, Powell is relatively dovish compared to Warsh (the other front-runner). While the impact from Trump's pick for the next Chair should ultimately have a limited impact on the dollar, the buck doesn't need good reasons to sell off these days. After looking overbought in earlier October, the dollar is now in its latest short-term down cycle.
USD/JPY strengthened slightly yesterday but sold off today. The exchange rate is currently just below 112.30. EUR/USD continues to rebound strongly, with the pair rising above 1.1860 this morning. The pound is also doing well, with GBP/USD currently above 1.3240.
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. Wednesday's FOMC minutes suggested that the Fed is concerned that low inflation is not temporary, but is mostly in favor of a rate hike in December anyway. 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 falling sharply in the second week of October, we are downgrading the US dollar to neutral. Thanks to rising doubts regarding Trump's ability to get tax reforms through Congress and strong performance in the euro and the Chinese yuan, the US dollar is broadly weakening. While the currency remains in oversold conditions in the medium-term, the dollar bull market that was intact since early September is now taking a breather.