The US dollar is currently flat after rising yesterday. The buck has strengthened significantly over the last two sessions following Federal Reserve Chair Powell's testimony to Congress. As expectations rise for four or more rate hikes this year, the US dollar is rallying accordingly. Relative to its major trading partners, the US has the best economic outlook today. Earlier this week, European Central Bank President Mario Draghi struck a relatively downbeat tone, suggesting that slack in the Eurozone may be higher than forecast. Recent inflation data from the Eurozone has also been below consensus estimates. US inflation data, on the other hand, has been much healthier thanks to wage growth. Turning to commodities, crude oil prices have been falling thanks to surging US production and inventories. As crude oil trades inversely to the dollar, falling crude oil tends to push up the dollar in relative terms. Looking at recent economic data, the second-take of GDP growth and core personal expenditures for Q4 met consensus estimates. Pending home sales, however, fell below expectations as rising mortgage interest rates weaken demand. Our short-term outlook on the dollar is neutral, while our medium-term outlook remains bearish.
USD/JPY is up slightly today and currently trading above 106.80. EUR/USD is flat and trading above 1.220. The pound is flat, and GBP/USD is currently above 1.3750.
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). Q4 GDP growth (2.5%) and QoQ Q4 Core Personal Consumption Expenditures (2.7%) met expectations. Later today, 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.
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.