The US dollar is lower against all major currencies today. The buck is currently the weakest against the Canadian dollar and the British pound. Yesterday, the dollar moved up sharply during European trading hours, but ended the day flat. As the currency continues to look overbought (particularly against the euro and the British pound), the buck is due for a short-term pullback.
Turning to recent developments, yesterday's producer price index figures were below consensus estimates. As crude oil prices are up 60%+ year-over-year, inflation is expected to accelerate over the coming months. In today's environment of high growth, accelerating inflation is a positive for the dollar as this raises the expectation for future rate hikes. In a speech delivered yesterday, FOMC member Bostic said that inflation rates are likely to overshoot the Fed's 2% target. While several members of the Federal Reserve have acknowledged the likelihood of inflation temporarily exceeding the Fed's target, few have addressed the possibility of a sustained increase in inflation above 2%. Following new sanctions on Iran, there is a risk that inflation increases beyond current expectations if crude oil prices keep surging. Later today, we'll see the consumer price index for April. Our short-term and medium-term outlook on the dollar is bullish.
USD/JPY is flat today and currently trading above 109.70. EUR/USD is up slightly and trading above 1.1860. GBP/USD is up slightly, and currently above 1.3560.
This week’s US dollar economic calendar includes inflation figures and consumer sentiment. March consumer credit figures ($11.6 vs. $16b expected) were below expectations. FOMC member Bostic said that "some overshoot" on inflation is fine, while Kaplan said that the removal of monetary accommodation should be gradual. Fed Chair Powell said that emerging markets are prepared for further rate hikes, while President Trump pulled out of the Iran deal. The April producer price index (2.6% vs. 2.8% expected) missed expectations while Bostic said that inflation is likely to increase above 2% temporarily. Later today, we’ll see weekly initial jobless claims, and the consumer price index for April. Given the recent acceleration in inflation, the data will be watched closely by foreign exchange traders. On Friday, we’ll see consumer sentiment for May. Last week, the Federal Reserve kept interest rates on hold and signaled comfort with inflation slightly above its two percent target.
As the dollar rises, we are now bullish on the US dollar. Note that the currency is trading within normal conditions. This is based on technical indicators when looking at a weekly chart.