The US dollar is up slightly this morning, and remains in a bullish short-term trend. The dollar was fairly volatile yesterday following several news headlines from Washington. The currency sold off after CNBC reported that up to three Republican senators had refused to support Trump's tax reforms. Given the GOP's weak hold of the Senate, Trump's tax reform bill will fail to pass if three Republican senators vote against it (assuming all Democrats also vote against it). This was followed by more news headlines suggesting that Trump had conducted a straw poll for the next Fed Chair among Republican senators. Reuters reported that John Taylor had emerged as the favorite. Given Taylor's hawkish views, the dollar rallied on the news. Beyond politics, the dollar is also supported by rising bond yields. Interest rate hike expectations are growing, with 96.7% of futures speculators currently betting on another rate hike in December. The dollar has done particularly well recently against inflation-sensitive assets such as the Japanese yen and gold.
USD/JPY remains very strong and is now just below 114. EUR/USD is in a holding pattern this week, given the upcoming ECB meeting on Thursday. The pair currently below 1.1860. The pound sold off sharply yesterday on comments from the Bank of England, with GBP/USD currently below 1.3130.
This is a critical week for economic data relating to the US dollar. Manufacturing PMIs (54.5 vs. 53.5 expected) and services PMIs (55.9 vs. 55.6 expected) both beat expectations. Later today, we'll get house prices, new home sales and durable goods. On Thursday, we'll get pending home sales as well as continuing and new jobless claims. Finally, on Friday, we'll see all-important Q3 GDP numbers and Q3 Core PCE figures (Core PCE is the Fed's preferred measure of inflation). Expectations are high for good numbers this week. Strong growth data will continue to support the dollar and future rate hike expectations.
Thanks to progress in enacting Trump's tax reforms, the US dollar has been strengthening since mid-October. The currency has also been supported by rising bond yields as Trump looks set to select the next Federal Reserve Chair. As such, we are upgrading our medium-term outlook on the dollar back to bullish. After looking oversold in early October, the dollar is now trading within normal conditions. This is based on technical indicators when looking at a weekly chart.