The US dollar is actively strengthening its positions throughout the market. Among all major currencies, only the pound does not succumb to the pressure of the US currency. The Briton now lives only the theme of Brexit, ignoring other fundamental factors. All other currencies are forced to reckon with the growing power of the greenback. Moreover, according to the estimations of currency strategists, this strengthening can become the beginning of a full-scale rally. However, any talk about the likelihood of this scenario is reduced to tax reform: will it be passed, when, in what form and what consequences will it entail? All these questions excite the minds of traders and analysts, and the dollar continues to be in demand.
Briefly recall the background: the House of Representatives and the Senate have adopted their own versions of the tax reform, which differ in a number of key points.In both houses of the project it was voted by a whisker, but in this case, the Republicans look more cohesive, as compared to the epic fail during their attempt to repeal Obamacare. Nevertheless, with all the relative cohesion, Republican congressmen could not accept the legislation in unison, so now lawmakers will have to look for a common denominator.
Just yesterday, the US Senate began negotiations with the House of Representatives to eliminate disagreements. By the way, this fact served as a catalyst for the strengthening of the dollar against the entire basket of currencies. The dialogue initiated increases the likelihood that the final bill will be adopted before the end of this year (the White House awaits the final version before Christmas). If the main "revolutionary" points of the reform remain (reduction of corporate tax and favorable conditions for the repatriation of funds), then the dollar will indeed receive a strong support.
Note the strengthening of the American currency in the first months after Trump's victory: this dynamics was due only to the expectation of fiscal stimulation. And just as rapidly the dollar fell, when the reform was in jeopardy. Now we are seeing another wave of optimism. Only this time the probability of a favorable outcome is somewhat higher: the congressmen are literally a step away from compromise. However, the very fact of reaching this stage does not exclude the scenario of a complete failure. In this case, the greenback will collapse all over the market, impulsively and without recoil. But, in my opinion, the chances of approving a single version of the reform are big enough.
Another factor in the strengthening of the dollar is the US labor market. Yesterday's ADP report gave a signal to nonfarm payrolls to come in at the "green zone" or at least at the forecast levels. According to ADP, in November, 190,000 jobs were created, while the forecast for the Friday release was 200, 000. It is likely that the indicator will again be better than expected, and the unemployment rate will update its historical lows, dropping to 4%. The US labor market will confirm its "reputation", leaving behind abnormal fluctuations.
All of the above says in favor of the dollar. However, we must not forget about the risks. The probability of a failed vote on the reform was already mentioned. The next risk factor is a further slowdown in inflation. In the "package" of tomorrow's non farm payrolls report, the average wage will be also published. In October, it fell to a zero level, and today analysts expect its growth to 0.3%. Even the forecasted dynamics looks weak - and if the expectations are not met and the indicator falls into a negative area, then the market will again talk about the systemic problem of inflation. This will be an indication of a very weak consumer price index, which will be published next Wednesday (December 13), just a few hours before the December Fed meeting.
It has been repeatedly said that the Fed in fact has decided to raise the rate at the upcoming meeting. The market also took this information into account and has long been considered in prices. Therefore, the tone of the accompanying statement and the subsequent rhetoric of Janet Yellen will be important for the market. Not so long ago, she stated in Congress that she was "puzzled" by such weak inflation. If the level of average wages in the US and consumer prices again demonstrate a negative result, this may affect the position of the regulator's members. However, weak inflation and without the latest releases will most likely become the theme of the December 13-14 meeting. In other words, the Fed may disappoint dollar bulls by taking a wait-and-see stance regarding the prospects for 2018.
Thus, the market may be between the "hammer and the anvil": on one hand - the tax reform (if it is still accepted), on the other - the vague or "dovish" position of the Fed. These are very powerful fundamental factors that can determine the medium and long-term trend of dollar pairs. The situation will swing to one of the sides soon, so do not make hasty conclusions - the dollar has every chance of both taking off by the end of the year, and falling in price to the entire basket of currencies.
The first test of the US currency will be tomorrow.
