The US dollar is fairly mixed today. The buck is strengthening against the Canadian dollar and the Japanese yen, while weakening against the euro and the Australian dollar. Yesterday, the dollar moved higher following another jump in US Treasury bond yields. Looking at trading conditions, the dollar continues to look overbought on a short-term time frame.
Turning to recent developments, strong US growth coupled with high inflation remains the biggest driver in foreign exchange markets. As the outlook for US growth is currently the best among major peers, the dollar is likely to keep pushing higher. Following significant strength against both developed and emerging market foreign currencies, the buck looks due for a short-term pullback. While the dollar currently looks overbought, the currency can keep strengthening as it remains in a bullish trend. Even the the poorest performing currencies, such as the Argentine peso, have stabilized in the last few trading days. Longer-term, we continue to see a stronger dollar thanks to supportive economic conditions in the US and a significant slowdown in Europe, Japan and emerging markets. Our short-term and medium-term outlook on the dollar is bullish.
USD/JPY is flat today and currently trading above 110.80. EUR/USD is up slightly and trading above 1.180. GBP/USD is flat, and currently above 1.3510.
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. FOMC member Kashkari expressed disappointment regarding low wage growth, while Kaplan said the US economy was at full employment. Weekly initial jobless claims (222k vs. 215k expected) were slightly worse than expectations while the Philadelphia Fed manufacturing survey for May (34.4 vs. 21.0 expected) were ahead of expectations. Later today, we’ll hear speeches from FOMC members including Mester, Kaplan and Brainard. 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.