After some roller-coaster rides during the week, Dollar staged a broad based come back before the weekly close. The Republicans’ tax plan is now back on track for being signed off by US President Donald Trump, by the end of the year, probably even before Christmas. There were various factors sank the greenback. Tamer than expected core CPI reading was one. An additional dissenter in Fed’s rate hike was another. But looking back, the uncertainty on whether Senate could get the bill passed was probably the biggest weight on Dollar. It’s still early to tell but focus will now be on whether Dollar could stage a sustainable turnaround before year end.
Staying in the currency markets, Sterling ended as the weakest one as traders cashed in on news that EU formally approved of the sufficient progress on Brexit negotiations. UK and EU team will enter into trade talks next year. BoE kept bank rate unchanged at 0.50% as widely expected, and revealed nothing new in its communications. (more in BOE Stands on Sideline after November Hike, Attributing Inflation Overshoot to Weak Currency). Euro was the second weakest one. ECB left monetary policies unchanged as widely expected too. GDP forecast for 2018, 2019 were raised. Headline inflation forecast for 2018 was also raised. But core inflation forecast for 2018 was revised lower. Also, ECB is not expecting inflation to hit target even in 2020. (More in ECB Upbeat On Economic Outlook, While Maintaining ‘Dovish Tapering’ Tone).
On the other hand, New Zealand and Australian Dollars were the star performers. Kiwi was boosted by the appointment of a former RBNZ Deputy Governor and chief economist Adrian Orr as next RBNZ governor. Orr will oversee the reform at RBNZ and it’s generally believed he will take a practical and realistic approach. Australian Dollar was boosted by stunning employment data.
Tax bill en route to Trump’s desk by year end
The Republicans have finally finalized the reconciliation of the tax plans. The final legislation was released late Friday, with the agreement. There are over 1000 pages in these two documents. Here is a summary of the Tax Cuts and Jobs Act policy highlights. The most significant development on Friday was there Sens. Marco Rubio of Florida and Bob Corker of Tennessee both changed their minds and expressed the support for the bill. Both House and Senate are now expected to vote on the bill by mid-week. And as House Majority Leader Kevin McCarthy of California said, the bill will be delivered to Trump’s desk "just in time for Christmas".
FOMC announcement was not dovish at all
With corporate tax cut to 21% next year, it’s getting more likely that Fed will raise interest rate three times in 2018 as policymakers projected. The FOMC announcement during the week wasn’t a dovish one. Fed lifted federal funds rate by 25bps to 1.25-1.50% as widely expected. GDP growth was revised higher to 2.5% in 2017, 2.5% in 2018 and 2.1% in 2019, from 2.4%, 2.1% and 2% respectively. Unemployment rate was revised lower to 4.1% in 2017, 3.9% in 2018 and 2019, and 4% in 2020, from 4.3%, 4.1% and 4.2%, respectively. PCE inflation projection stayed unchanged all over the Fed’s forecast horizon, at 1.9%, 2%, 2% and 2% in 2018, 2019, 2020. The only dovish part was that Chicago Fed President Charles Evans joined Minneapolis Fed President Neel Kashkari in dissenting the hike. But Evans is a known doves and he has already hinted in his recent comments that he’d vote "no". So that shouldn’t be a surprise to anyone who followed closely.
Dollar index to take on 94.16 again
Dollar index once looked rejected by 94.16 resistance last week. But subsequent pull back was relatively shallow, contained at 93.28. Friday’s rebound now put 94.16 back into focus for this week. Decisive break there will confirm that fall from 95.15 has completed at 92.49. And in that case, a retest of 95.15 should be seen next. In that case, there would be prospect of hitting 38.2% retracement of 103.82 to 91.01 at 95.90 around the turn of the year. But again, break of 92.49 will put 91.01 low back into focus.
Technically in the currency markets, the break of 94.16 in dollar index has to be accompanied by firm break of 1.1712 key support in EUR/USD. In addition, we’d also prefer to see firm break of 113.74 in USD/JPY, 0.9977 in USD/CHF and 1.2916 in USD/CAD to confirm Dollar’s strength. Otherwise, we’ll stay skeptical.
Trading strategy
Our order to buy USD/CAD on break of 1.2916 was not filled. USD/CAD dipped sharply after comments from BoC Governor Stephen Poloz raised the chance of a Q1 rate hike. But the pull back was contained by 55 day EMA as the pair quickly rebounded. We’d maintain our technical view on USD/CAD. Firstly, rebound from 1.2061 is still in progress. Consolidation from 1.2916 is about to finish. Secondly, the long term correction from 1.4689 (2016 high) should have completed at 1.2061. Rise from there should extend to 61.8% retracement of 1.4689 to 1.2061 at 1.3685 and possibly above. Hence, we’ll try to buy USD/CAD on break of 1.2916 again this week.
EUR/USD Weekly Outlook
EUR/USD rebounded to as high as 1.1862 last week but reversed from there. Initial bias is neutral this week first with focus on 1.1712 cluster support (61.8% retracement of 1.1553 to 1.1960 at 1.1708) again. Decisive break there should confirm completion of rebound from 1.1553 to 1.1960. This would also be supported by a head and shoulder pattern (ls: 1.1860; h: 1.1960; rs: 1.1862). And in that case, deeper fall should be seen through 1.1553 to extend the medium term decline from 1.2091. Meanwhile, above 1.1862 will revive near term bullishness and target 1.1960 and above.
In the bigger picture, rise from 1.0339 medium term bottom is seen as a corrective move for the moment. Therefore, in case of another rally, we’d be expect 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 to limit upside and bring reversal. Meanwhile, sustained trading below 55 week EMA (now at 1.1435) will suggest that such medium term rebound is completed and could then bring retest of 1.0339 low.
In the long term picture, 1.0339 is seen as an important bottom as the down trend from 1.6039 (2008 high) could have completed. It’s still early to decide whether price action form 1.0339 is developing into a corrective or impulsive pattern. On the upside, strong resistance could be seen from 38.2% retracement of 1.6039 to 1.0339 at 1.2516. On the downside, we’re not anticipating a break of 1.0339 in medium term.
