Fundamental Forecast for the US Dollar: Neutral

Politics dominated US Dollar price action last week, as expected. Senate Republicans underwhelmed with their version of tax cut legislation, offering up a plan that differed on several key points with the House of Representatives proposal and thus opening the door to a thorny reconciliation process. Perhaps most critically, the Senate’s scheme would delay corporate tax cuts until 2019.

The greenback did not take kindly to these developments. Traders have expected expansionary fiscal policy championed by the Trump administration to boost inflation, forcing the Federal Reserve into a steeper rate hike cycle. Ebbing confidence in GOP lawmakers’ ability to steer campaign promises into legislation undercut this narrative, with the currency snapping a three-week winning streak.

Looking ahead, the scramble to negotiate a single tax reform bill and pass it before year-end will generate a steady stream of headlines from Washington DC, keeping last week’s themes very much in play. This time however, price action will be further complicated by a barrage of top-tier economic data releases and speeches from key policy officials.

Fed Chair Janet Yellen is due to speak on Tuesday and might be a bit more candid now that Jerome Powell has been nominated to replace her in February. The following day, CPI and retail sales statistics are due to cross the wires. Softer results from the prior month are expected on both fronts but broad outperformance on US economic news-flow in recent months opens the door for upside surprises.

A rate hike in December is all but priced in, suggesting the 2018 policy path is the central object of speculation. This probably tilts the scales toward politics as the more potent catalyst at work. Still, a change in the baseline assumption for where the Fed expects to go in 2018 – coming from Chair Yellen or a sharp deviation from forecasts on key data – might substantially alter the way forward.