The dollar ended flat yesterday and is trading down this morning. Looking at technical conditions, the currency still looks overbought in the short-term, and is thus susceptible to a pullback. According to Reuters, the US Senate remains on track to release its markup of the tax reform bill later today. As we explained yesterday, if the House and Senate do not pass similar bills, it is unlikely that tax reforms will be enacted in 2017. The tax bill is far from a done deal in both the Senate and the House. In the House, Republicans from high tax states such as New Jersey have enough votes to torpedo the bill assuming Democrats and independents vote against it. In the Senate, the GOP has a fairly slim majority, making the task of pleasing all sides very difficult. For now, the dollar continues to be fairly strong in anticipation of both tax bills. Given the significance of today's event, there is a strong possibility that the dollar weakens after the bills are announced. This may be another classic case of 'buy the rumor, sell the news'.
USD/JPY is currently trading just below 113.65. EUR/USD has been flat for the last two sessions and is now below 1.1610. The pound is rebounding after weakening yesterday, with GBP/USD currently above 1.3140.
This is a relatively light week for the US dollar looking at the economic calendar. JOLTS job openings beat slightly (6.093m vs. 6.091m expected), while consumer credit growth was also better than expected (20.8b vs. 18b). On Thursday, we’ll see continuing and initial jobless claims. Last week the Fed did not raise interest rates, choosing instead to set the stage for a hike in December.
As the dollar continues to trade sideways, we are downgrading the US dollar to neutral. After strengthening recently, the currency is looking overbought. 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.