The US dollar is slightly lower today. The buck is currently the weakest against the British pound and the Australian dollar. Yesterday, the dollar traded near highs last seen in December 2017. The currency was particularly strong against the euro, which is selling off after Italy's new government demanded debt relief from the ECB. While the dollar looks overbought on a short-term time frame, the currency remains in a bullish trend and is likely to keep rising over a longer time horizon.
Turning to recent developments, rising bond yields remain the big story in foreign exchange markets. Going into the summer, easing base effects should keep inflation on an accelerating trend. In other words, as inflation was weak at this point last year, year-over-year inflation should keep rising. As a result, bond yields are likely to keep moving up, helping the dollar continue its ascent. The buck's move up is particularly pronounced as the outlook for growth is the strongest in the United States. When the outlook for growth is weaker (looking at the Eurozone for example), issues such as debt and deficits return to the forefront. This explains why the euro sold off sharply yesterday, but did not react to the outcome of Italian elections a few months ago (when the region had a much more positive growth outlook). Our short-term and medium-term outlook on the dollar is bullish.
USD/JPY is flat today and currently trading above 110.30. EUR/USD is down slightly and trading above 1.1820. GBP/USD is flat, and currently above 1.3560.
This is a relatively light week for the US dollar economic calendar. FOMC member Mester reiterated support for gradual rate hikes, while the Fed’s Bullard was opposed to further rate hikes. MoM April retail sales (0.3%) met expectations. FOMC member Williams said that he is "very positive" on the US growth outlook. April housing starts (-3.7% vs. -1.1% expected) and capacity utilization (78% vs. 78.4% expected) were slightly below expectations. April Building permits (-1.8% vs. -2.3% expected) and industrial production (0.7% vs. 0.6% expected) were ahead of expectations. FOMC member Bostic said that rate hikes were the correct path, but cautioned on the possibility for an inverted yield curve. The Fed’s Bullard said it's tools for predicting growth and inflation warrant a review. Later today, we'll hear from FOMC member Kashkari and Kaplan. We’ll also see weekly initial jobless claims, and the Philadelphia Fed manufacturing survey for May. On Friday, we’ll hear a speech from FOMC member Mester. Last week, the core April consumer price index was below expectations.
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.