After moving into short-term overbought territory earlier this week, the US dollar is taking a breather. Yesterday saw US bond prices fall after news reports suggested that the upcoming Republican tax bill may phase in "gradual" corporate tax cuts over time. Republicans previously announced that the first draft of the bill will be made public this Wednesday. Beyond the issue of phasing in tax cuts, Reuters is also reporting that the risk of a delay is increasing as House Republicans grapple over details. Issues such as the SALT deduction (which we covered in our previous take of the House vote), doubling the standard deduction and property tax deductions are all contentious issues. Looking at monetary policy, Powell is now an overwhelming favorite in betting markets to become the next Federal Reserve Chair.
USD/JPY is now just below 113, having fallen below this level earlier in the day. EUR/USD is flat today after a small gain yesterday and is now above 1.1640. The pound has registered small gains against the dollar, with GBP/USD currently above 1.3220.
While this week includes a Fed interest rate decision, expectations are very low for a rate hike. Instead, markets will be focused on the statement to gauge the Fed’s perspective on economic data. Core Personal Expenditures remained flat over the prior figures (1.3% vs. 1.3% prior), while the Dallas Fed manufacturing index was higher than prior figures (27.6 vs. 21.3 prior). Later today, we’ll see Case-Shiller home prices and the Chicago PMI. Wednesday is Fed day alongside ISM manufacturing, Market manufacturing PMIs, construction spending and ADP employment figures. On Thursday we’ll see jobless claims, labor costs and productivity. Finally on Friday we’ll get nonfarm payrolls, labor force participation, the unemployment rate, Markit Services PMIs, ISM non-manufacturing PMIs and factory orders. Last week saw very strong Q3 GDP figures.
After US bond yields fell on Fed Chair and tax news, we are downgrading the US dollar to neutral. In early October, we warned that the dollar looked overbought in the short-term time frame. After strengthening recently, the currency is now again above overbought thresholds. 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.