Summary:

• US dollar enjoying a bright start to the week
• Pre-recorded Trump interview says Fed chair decision to be made shortly
• Powell or Taylor seen as most likely candidates

 

 There has been a fairly broad move higher in the US dollar today with the currency making gains against the majority of its peers. The largest gains can be seen against cryptocurrencies, with only the New Zealand dollar making any headway against the greenback. 

 The USD has begun the week brightly and is trading higher against the majority of its crosses. Source: xStation 

The USD index has moved above last week’s high and is trading not far from a 3-month peak. The 94 handle has acted as resistance on several occasions in recent months but a clean break above here could be seen to mark a reversal. 94.05 can be viewed as the neckline in a potential inverse head and shoulders setup and a break above here would target a larger move to 97.12 if it plays out in a textbook fashion. (There is a very similar pattern developing on USDSEK. A possible neckline at 8.1730 has been broken this morning.)

 There is a potential inverse head and shoulders pattern forming on the USD index. A break of the neckline at 94.05 could be seen as a breaking of the neckline. Source: xStation

Today saw Fox news air a pre-recorded interview with US president Donald Trump in which he stated that he will make his decision on the next Fed chair “very shortly.” Trump is scheduled to to head to Asia on the 3rd November and most expect him to have announced the next Fed chair before he leaves. The incumbent Janet Yellen is still in the running for another term but the favourite for the role is Jerome Powell. Powell is seen to have a similar view on monetary policy as Yellen and therefore his appointment wouldn’t be too much of a shock to the markets.

Stanford economist John Taylor is also in the running and he is famous for stating his belief of a rules-based approach to monetary policy. The so-called “Taylor” rule takes into account the difference between potential and actual values for inflation and real output and whilst there is some degree of subjectivity here (specifically the potential values”) current estimations would suggest that the Fed funds rate would be markedly higher if this rule were applied (estimates are in the range of 3.5-4.0%).

On the data front today is fairly quiet with the release of the Chicago Fed national activity index seeing little market reaction. The gauge rose to +0.17 vs -0.13 expected and could be deemed as supportive of the US dollar’s rise. We earlier noted that 10 year T-notes have fallen to a potentially key support level and should this level be breached then there would be additional support for the US dollar with the fall in price of the bond implying higher yields and thus a stronger currency.