Yesterday was a great day for the dollar, thanks to a sell off in the euro and a crucial House of Representatives vote. The dollar initially rallied after the ECB failed to meet the market's tapering expectations, choosing instead to reduce the scope of the existing program without defining a clear end date. After rising in relative terms against the euro, the dollar then strengthened again after the House of Representatives passed the Senate budget resolution. Now that the budget resolution has passed both chambers of Congress, the White House has a much higher chance of getting tax reforms passed. This is because the resolution unlocks reconciliation, a tool that allows bills to pass with a simple majority (instead of a three-fifths majority) in the Senate. After a big day yesterday, the dollar continues to trade up this morning. In other news, Reuters is reporting that Jerome Powell and John Taylor are the leading candidates for the Fed Chair role. The story was first covered by Politico, a blog covering political news.
USD/JPY is now back above 114, and is up to 114.10 this morning. EUR/USD remains extremely weak and is now below 1.1640. The pound is also down against the dollar, 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. Durable goods orders were very strong (2.2% vs. 1% expected) while new home sales (0.67m vs. 0.56m expected) also beat expectations. Pending home sales missed expectations (0% vs. 0.2% expected) while initial jobless claims beat expectations (233 vs. 235k expected). Later today, 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.
After the ECB meeting and the House budget resolution vote, we are upgrading the US dollar back to bullish. In early October, we warned that the dollar looked overbought in the short-term time frame. After strengthening recently, the currency is approaching overbought conditions again. Our analysis is based on various technical indicators when looking at a daily chart of the US dollar index.
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.