Stacked US Economic Calendar, Trump 'SOTU' has DXY on Edge
- DXY Index hovering around 101.00; markets non-committal to a direction before fiscal policy details, pace of Fed rate normalization become clearer.
- Crowds are buying the US Dollar during recent stumbles, which isn't necessarily a good thing for a bullish DXY move.
The US Dollar (via DXY Index) is little changed on the morning, hovering around 101.00 as traders await the onslaught of economic news and policy speeches, before even attempting at committing to a significant move today. The US economic data spans a wide variety, from the second Q4'16 US GDP reading to February US Consumer Confidence, yet both will pale in comparison to US President Donald Trump's first address to a joint session of Congress, the State of the Union.* (See the economic calendar for full details.)
While the speech will coverage a wide range of issues, there are only a few that markets care about – tax reform, infrastructure spending, and plans to repeal/replace/rename/repair the Affordable Care Act/Obamacare. The large promises made before the November 8 election and lack of specific policy details since the January 20 inauguration have been working against the US Dollar, in effect due to the prospect of any fiscal policy goals not being accomplished immediately.
As per the Mundell-Fleming framework (or IS-LM-BOP model), given the United States' high capital mobility, loose fiscal policy should lead to a rise in inflationary pressures, which in turn should necessitate tighter monetary policy from the Federal Reserve. With only two priced-in at present time (June and December), and a coin-flip for one in March, should US President Trump put some ‘meat’ on the ‘bones’ of taxes and infrastructure, and outlining a specific timeline in particular, then there is a strong chance that markets reassess their current expected timeline of Fed rate hikes this year.
*Technically, while this is usually the "State of the Union," because it is his first speech as president, Trump doesn't have the time under his belt to reflect on the year that was. You'll hear it referred to as an "address to a joint session of Congress."
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--- Written by Christopher Vecchio, Senior Currency Strategist
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