Talking Points:
- It's looking increasingly likely that the US federal government (despite one single party controlling the House, the Senate, and the White House) will shutdown at midnight tonight.
- The US Dollar (via DXY Index) is feeling the sting of rising political risks, falling to a fresh three-year low today.
- Retail trader sentiment suggests a tougher trading environment for the US Dollar heading into next week.
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The US Dollar remains trapped in the downtrend thats carried it to fresh three-year lows over the past week, underscoring what has been a rough start to 2018 for the US Dollar. With the DXY Index bearish momentum firmly in place - price just treated the daily 8-EMA as resistance while both MACD and Slow Stochastics trend lower in bearish territory - it's still too early to call a bottom in the US Dollar.
Even if there are some fundamental bright spots, traders don't seem to care. As noted yesterday, US economic data has been generally outperforming expectations, with the Citi Economic Surprise Index up at +70.0. Medium-term inflation expectations, as measured by the 5-year, 5-year inflation swap forwards, are nearing their 2018 high and their highest levels since last May near 2.36%. The US Treasury 10-year yield is now at its highest level since September 2014, and Fed funds futures are pricing in an 89% chance of a rate hike by March.
The only other variable not being accounted for, then, is the political risk being generated by fiscal policymakers. It's looking increasingly likely that the US federal government (despite one single party controlling the House, the Senate, and the White House) will shutdown at midnight tonight.
The implication from this US government shutdown issue is that any bipartisan compromise in a mid-term election year like this one will be hard to come by, and that includes an infrastructure spending bill. Without this prospect of additional US fiscal stimulus, both growth and inflation expectations could take a hit, making it difficult for the Federal Reserve to follow through on its promise of three rate hikes in 2018 - a realization that would surely undermine the US Dollar even further.
Read more: It’s Still Too Early to Call a Bottom in the US Dollar
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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