The US dollar fell sharply yesterday after CPI numbers came in below expectations and the Fed maintained its guidance for 2018. Ahead of the events, expectations were fairly high. Many believed that CPI numbers could have been stronger following good PPI numbers. Secondly, there was also speculation that the Fed may adjust its 2018 guidance and call for three to four rate hikes. Instead, the Fed maintained the status quo and projected three rate hikes in both 2018 and 2019. As commodity prices (as reflected in indices such as the Bloomberg Commodity Index) have been flat since early November, the outlook for future inflation is less benign. As such, news regarding tax reforms will drive dollar trading in the near future. In political news, Congressional Republicans have reached a deal that reconciles the two versions of the tax bill. According to Reuters, a vote is expected next week. Our medium-term outlook on the dollar remains neutral.
USD/JPY is up today and currently trading just above 112.70. EUR/USD is down today and currently just above 1.1810. The pound is up slightly, with GBP/USD currently above 1.3420.
This is a big week for the US dollar in economic data and events. PPI (producer prices) was stronger than expected (3.1% vs. 2.9% expected). While November CPI met expectations (2.2%), Core CPI missed expectations (1.7% vs. 1.8% expected). The Fed maintained its outlook for three rate hikes in both 2018 and 2019. Later today, we’ll see retail sales, as well as Markit PMIs. On Friday we’ll see industrial production and capacity utilization. Last week, nonfarm payrolls beat expectations while wage growth disappointed.
As the dollar rebounds from its lows in early September, we are upgrading the US dollar to neutral. The currency is neither overbought nor oversold today, and trades within a normal range. This is based on technical indicators when looking at a weekly chart.