- The US Dollar (via DXY Index) is working on its third consecutive down day despite headlines that the tax bill will make its way into law.
- Retail trader sentiment points to further EUR/USD and GBP/USD gains in the near-term.
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Despite the enthusiasm in US equities around passage of the tax reform bill, the US Dollar seems to have very little to say about it. After all, since it become clear at the start of the week that the reform bill would be passed by today, the US Dollar (via DXY Index) has endured a three-day slide.
The fact of the matter is that the tax reform bill should be a bonanza for corporate earnings - which are already strong and trending positive - but not necessarily for jobs growth. Realistically, most of the funds repatriated or earned via higher revenue (thanks to lower taxes) will be given back to shareholders via dividends or share buybacks; raises for workers (wage growth), hiring (jobs growth), or jobs training (productivity increases) are at the bottom of the priorities list for most US corporations (per this Bank of America survey of corporations' intentions about the tax cut proceeds).
Accordingly, we should not be surprised by how various asset classes are reacting: US equities are quite strong thanks to the prospect of boosted earnings in 2018; the US yield curve (2s10s) remains near its flattest levels of the year as long-term inflation and growth expectations haven't improved; and as a result, the US Dollar has not enjoyed a bid higher.
Now into the second half of the last full trading week of 2017, the US Dollar finds its technical posture eroding not just versus the commodity currencies, but now the European currencies too. Both EUR/USD and GBP/USD have seen their technical postures improve meaningfully in recent days, and now the IG Client Sentiment index suggests that bullish biases are appropriate in the near-term.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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