The US dollar is currently taking a breather after moving higher yesterday. While the dollar rose against all major currencies yesterday, the buck is currently weaker against the Japanese yen. The dollar had a limited reaction to Federal Reserve Chair Jerome Powell's prepared speech. However, the currency began rallying during the Q&A session that followed. While Powell did not comment specifically on the possibility of more than three rate hikes this year (the consensus estimate), he provided a relatively upbeat view of the economy. Specifically, he stated that his view of the economy had improved since last December, given better data, tax cuts and the likelihood of higher wages in the future. The market interpreted his comments as opening the door to four or more rate hikes this year, causing bond yields and the dollar to strengthen. Looking at reactions in other markets, equities and commodities fell thanks to the increasing probability of more rate hikes this year. Unsurprisingly, USD/JPY is falling today as a result.
Turning to economic data, most figures released yesterday were below expectations. The goods trade balance, durable goods, and the MoM housing price index all missed consensus estimates. The Atlanta Fed's GDP Now estimate for Q1 growth also fell from 3.2% to 2.6%. Our short-term outlook on the dollar is neutral, while our medium-term outlook remains bearish.
USD/JPY is down today and currently trading above 107.0. EUR/USD is flat and trading above 1.220. The pound is flat, and GBP/USD is currently above 1.3890.
Turning to US economic data this week, we’ll see GDP figures and Core Personal Consumption Expenditures. New home sales (0.59m vs. 0.65m) and the Chicago Fed national activity index (0.12 vs. 0.15 expected) were below consensus estimates. The Dallas Fed manufacturing index (37.2 vs. 28.4 expected) blew past estimates. St. Louis Fed President Bullard warned against "substantially" higher interest rates. Fed Chairman Jerome Powell delivered an upbeat forecast for the US economy. Durable goods (-3.7% vs. -2% expected) missed expectations while YoY Case-Shiller home prices (6.3%) met expectations (note month-over-month figures missed consensus estimates). Later today, we’ll see the second take of Q4 GDP growth and Q4 Core Personal Consumption Expenditures. On Thursday, we’ll see January Core PCE figures, personal spending, initial jobless claims, construction spending, and Markit + ISM manufacturing PMIs. Last week, FOMC minutes suggested an improving outlook for growth and inflation.
As the dollar gains strength, we are upgrading the dollar to neutral in the short-term. Note that the currency is now trading within normal conditions in the short-term time frame. Our analysis is based on various technical indicators when looking at a daily chart of the US dollar index.
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.