Despite two significant announcements yesterday, the US dollar mostly traded sideways during the day, and ended the day slightly lower. The dollar is again a little lower this morning. House Republicans released their tax plan in the morning, which largely met the market's high-level expectations. The key provisions of the bill include:
The full text is available here. While the dollar initially fell after the draft bill was released, it quickly recovered later in the day. In other news, Trump formally appointed Jerome Powell to lead the Federal Reserve yesterday. In line with our previous commentary on the future Fed Chair, the impact of Powell's appointment is unlikely to have more than a short-term impact on the currency. This is because the Fed Chair does not wield a lot of power with regards to broader monetary policy, despite the prestige of the role. After looking overbought earlier this week, the dollar is now trading within normal parameters.
USD/JPY is now just below 114. EUR/USD is up slightly this morning is now above 1.1660. The pound fell sharply yesterday and is up slightly today, with GBP/USD currently above 1.3070.
The Fed did not hike interest rate as expected, choosing instead to set the stage for a rate hike later in December. 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). ISM manufacturing PMIs missed expectations (58.7 vs. 59.5 expected), while ADP employment figures beat expectations (235k vs 200k expected). Markit manufacturing PMIs were stronger than the previous print (54.6 vs. 53.1 prior). Jobless claims (229k vs. 235k expected) beat expectations, while labor costs (0.5% vs. 0.5% expected) met expectations. Later today, 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.