DXY Index Finds Little Follow-Through After Weekly Gap Open
- The US Senate and House need to reconcile the differences between their tax bills before anything can be signed into law; the last day of the session is December 14.
- Upcoming US data this week may offer a 'sell the rally' opportunity in the greenback ahead of next week's FOMC meeting.
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The US Dollar started the week on strong footing on the back of more progress in the Republican-controlled effort to implement a sweeping overhaul of the US taxcode. The greenback saw prices gap open higher versus the British Pound, Euro, and Japanese Yen, thanks to the hope that the legislative reform would ultimately result in higher deficit spending, and thus, inflation down the line.
Yet with signs emerging that the House and Senate tax bills won't be reconciled before the current Congressional session ends on December 14, the DXY Index hasn't been able to find much follow-through on the weekly gap open higher; it was a bridge to nowhere. The longer it takes for the tax bill to be passed into law, the less likely there will be a near-term impact on growth or inflation data.
Accordingly, with the US Dollar desperately waiting on tax reform developments, there are several pieces of data this week that could reinvigorate the greenback on their own. Notably, one of the two data series used to help guide expectations for the monthly Nonfarm Payrolls report is due out today in the form of the November US ISM Non-Manufacturing/Services Composite.
The November USD ISM Non-Manufacturing/Services headline reading is expected at 59 versus a prior reading of 60.1. The relatively similar headline reading expected this Wednesday is indicative of currently favorable business conditions that are easing off the strong burst in sentiment that has been so prevalent in US markets.
The US Dollar should show heightened sensitivity to this report given the economy’s tendency to follow the performance of the service sector, which accounts for approximately two-thirds of jobs in the United States. Look for the data, in conjunction with the ADP Employment report, to shape expectations for Friday’s Nonfarm Payrolls report.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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