The US dollar is doing well. The currency rose yesterday and continues to strengthen this morning. Yesterday, the dollar moved up after a report was released suggesting that Trump favored John Taylor to be the next Fed Chair. According to Bloomberg, John Taylor impressed the president at an interview last week at the White House. Taylor's odds of becoming the next Fed Chair have increased accordingly. Given his 'Taylor Rule' (an interest rate forecasting model), Taylor is likely to be much more hawkish relative to other Fed Chair candidates. Based on the current US economy, the Taylor Rule-implied interest rate should be north of 3.5% (three times higher versus 1.25% today). We have upgraded our short-term outlook on the US dollar to bullish accordingly. In political news, there is also rising optimism regarding Trump's tax reforms, following reports of Trump playing golf with Senator Rand Paul and calling on Senate Majority Leader Mitch McConell.
USD/JPY rose above 112 yesterday and is currently trading just above 112.10. EUR/USD is down again today after selling off yesterday, with the pair currently below 1.1760. The pound is also down against the dollar, with GBP/USD currently below 1.3250.
This week is a relatively light week for the US dollar. On Tuesday, we’ll get industrial production figures. On Wednesday, we’ll see building permits, housing starts and the Fed’s Beige Book survey. On Thursday we’ll get initial and continuing jobless claims. Finally, on Friday we’ll see existing home sales. Last week, both CPI and retail sales missed expectations, driving down expectations of Q3 growth and inflation.
Following increasing odds that John Taylor may be the next Fed Chair, the dollar is now strengthening. As such, we are now upgrading our outlook on the currency to bullish. Earlier, we warned that the dollar looked overbought in the short-term time frame. After weakening recently, the currency is now trading within normal conditions. Our analysis is based on various technical indicators.
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.