After a pretty good week for the dollar, the currency pulled back yesterday despite very good economic data releases. As the reality of passing Trump's tax reforms dawns upon the market, the dollar weakened while interest rates continued to rise. Looking at US politics, markets will be watching upcoming budget resolutions passed by the House and the Senate. The budget resolution debates will reveal to what extent Senate Republicans are focused on the budget deficit, and how the Senate will calculate the costs and revenues of the tax plan. Based on the failure of the previous healthcare bill, the tax plan will need to satisfy the overwhelming majority of Senate Republicans in order to pass.
USD/JPY sold off fairly sharply yesterday, but has almost fully rebounded as of this morning. The pair is currently trading close to 112.70. The euro is again trading sideways against the dollar today, with EUR/USD close to 1.1790 this morning.
On September 28, the US released better-than-expected GDP growth figures. Q2 GDP was revised up to 3.1% vs. 3% expected. 3% year-on-year GDP growth is very strong, and should bode well for US equity markets and the dollar. While the data was shrugged off yesterday, strong economic growth should not be ignored. In other data this week, US house price growth continues, while housing sales have been disappointing. Looking at the broader economy, durable goods orders have been very strong, thanks to larger-than-expected aircraft orders. On Friday we'll see year-on-year Core PCE figures - the Fed's preferred measure of inflation in the economy.
For the first time in 2017, we are upgrading our medium-term outlook for the dollar to bullish. The dollar has been in oversold conditions since late June and is due for a rebound. The currency has been strengthening in the last week of September initially thanks to the Federal Reserve suggesting that another interest rate hike was likely later this year. This was followed by Trump's tax plan which was revealed on September 27, which has also led to dollar strength. While the currency remains oversold in the medium-term, we expect the dollar to re-enter normal trading conditions in the coming weeks.