The US dollar continues to gain today, and is currently strengthening against all major peers except the Australian dollar. The dollar is currently strongest against the Japanese yen, which has been looking overbought recently. The yen is now pulling back from overbought conditions. While the dollar has been stronger for the past few days, the currency remains weighed down by fears of rising government deficits and accelerating inflation. US 10-year Treasuries are currently yielding close to 2.90% (the highest since 2011). As commodity prices fall and base effects dampen future inflation (year-over-year inflation is likely to slow down as inflation was high at this time last year), we argue that the outlook for inflation is relatively modest. Instead of inflation, we argue that the dollar is more likely to weaken thanks to strong growth and tightening monetary policy expectations outside the US. Our short-term and medium-term outlook on the currency remains bearish.
USD/JPY is up today and currently trading above 106.80. EUR/USD is down slightly and trading above 1.2380. The pound is down slightly, and GBP/USD is currently above 1.3970.
Looking at US economic data this week, there are quite a few Federal Reserve speakers. On Wednesday, we’ll see Markit PMIs (services, manufacturing and composite) as well as existing home sales. We’ll also get FOMC minutes. On Thursday, we’ll see initial jobless claims. Federal Reserve members including Kashkari, Quarles and Bostic will also be speaking on that day. On Friday, Dudley (another voting member of the Fed) will deliver a speech. Last week, the consumer price index was ahead of 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.