The US dollar is higher today after strengthening yesterday. Thanks to rising US bond yields and tomorrow's Federal Reserve interest rate decision and statement, traders are covering their US dollar short positions. While the Fed is not expected to raise interest rates tomorrow, there is a risk that the FOMC's statement is fairly hawkish, signaling a faster pace of rate increases this year. Based on forwards and market commentary, most participants expect three to four rate hikes this year. If the Fed surprises markets by signaling a faster pace of hikes, this could strengthen US bond yields and the currency accordingly. Looking at recent data, Core PCE met estimates (1.5%) while month-over-month incomes were higher than expected. The Dallas Fed manufacturing survey beat expectations by a wide margin. Recent data continues to suggest that the US economy is growing at a healthy pace while inflation remains low. Even with higher commodity prices, inflation this quarter is likely to remain low given base effects (at this time last year, year-over-year inflation readings were fairly high). Looking at technical indicators, the dollar is no longer looking oversold on a daily or weekly timeframe. Our short-term and medium-term outlook on the dollar remains bearish.
USD/JPY is down today and currently trading above 108.60. EUR/USD is down and is trading above 1.2360. The pound is down, and GBP/USD is currently above 1.4030.
Looking at economic data this week, there are quite a few items on the calendar. Most importantly, there is an FOMC meeting this week. Core personal consumption expenditures (1.5% YoY) met expectations. Personal incomes (0.4% MoM) beat expectations while personal spending (0.4% MoM) met expectations. The Dallas Fed’s manufacturing business index (33.4 vs. 14.6 expected) was significantly ahead of expectations. Later today, we’ll get Case-Shiller Home Prices. On Wednesday, we’ll see ADP jobs numbers, Chicago PMIs and pending home sales. More importantly, we’ll get a monetary policy statement from the Fed and an interest rate decision. The Fed is not expected to hike interest rates this week. On Thursday, we’ll see initial jobless claims, nonfarm productivity and Markit and ISM manufacturing PMIs. We’ll also see ISM prices paid. Finally on Friday, we’ll get nonfarm payrolls and the unemployment rate. We’ll also see average weekly hours and earnings, as well as factory orders. Last week, Q4 GDP came in below consensus estimates.
Thanks to recent dollar weakness, we are downgrading the US dollar to bearish. Note that the currency is trading within normal conditions. This is based on technical indicators when looking at a weekly chart.