Despite remaining in short-term overbought territory, the US dollar ended flat yesterday and is up slightly this morning. The dollar is supported by both political developments in Washington and strong economic data. Looking at news, Dow Jones is reporting that that the House tax bill will delay the repeal of the estate tax, while collapsing the number of tax bands from seven to four. The top income tax rate will remain 39.6%. Later in the evening, House Tax Committee Chairman Brady said that the committee is "making excellent progress" and expects to make an announcement later today. The US dollar rose on the news. In economic data, consumer confidence figures announced yesterday (125.9) were the strongest since 2000. Case-Shiller house price growth (5.9%) and Chicago PMIs (66.2) were also very strong. We published our broader thoughts on the upcoming tax bill yesterday. Later today, the Federal Reserve will announce its interest rate decision (no change is expected) and publish its statement.
USD/JPY is now above 113, and is currently trading closer to 113.80. EUR/USD remains flat today is now above 1.1640. The pound continues to make gains, with GBP/USD currently above 1.3290.
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). Case-Shiller home prices missed expectations (5.9% vs. 6% expected), while Chicago PMIs beat expectations (66.2 vs. 61). Consumer confidence figures were very strong (125.9 vs. 121). Today 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.