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US dollar looks for hints from payrolls, Tax Plan

Summary:

  • The NFP report on Friday is mostly about payrolls
  • The Fed will have a difficult task when it meets next week
  • A success or failure of Tax Plan in Congress could be decisive for the dollar
  • EURUSD could be in ABC correction on a daily time frame

The next two weeks can be absolutely crucial for the US dollar. Although our focus is on the data this Friday, Tax Plan and the FOMC meeting might prove to be even more important. Here’s our take on these events:

The NFP report (Friday, 1:30pm GMT)

The data from the US economy has been stellar as of late. One of the reasons is the labour market where the unemployment rate is just above 4% and healthy job gains solidify consumer confidence that in turn is the highest in more than a decade. There are only two stains on this picture: inflation and wages. The Fed still holds that inflation will rise next year but would be more assured if it sees stronger wage growth. That’s why this element will be more important than the headline number this Friday. Expectations are pretty high: the consensus sees wage growth accelerating to 2.7% y/y from 2.4% in November.

Tax Plan

The good news is that both chambers have voted their versions of the Tax Plan. The bad news is that these versions need to be reconciled until the end of next week and there are many differences regarding taxes for corporations and deductions for individuals. Surveys show that 63% of Americans think the bill favours the rich, outcome that could complicate reconciliation process. However, Republicans are determined to strike a deal so they can show anything to their electorate in less than a year ahead of mid-term elections.

FOMC (14 December)

Should the Tax Plan find its way to the White House, there would be expectations for tighter monetary policy. The problem is that the Fed will not know it at the time of the meeting and it still needs to send a very important message to the markets: do they still see 3 more interest rate hikes next year? That could be a make or break for the dollar and determine the way the currency ends 2017.

EURUSD technical situation

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Could EURUSD slide on a wave C? A lot will depend on the factors we’ve discussed above. Source: xStation5 

After rising in a continuous manner through late summer the pair has been somewhat stuck. The latest attempt from the bulls’ camp was impressive but it ended with lower highs. This could have been a wave B in ABC correction. Should bears be able to maintain their latest momentum, traders can observe supports at 1.1555 and 1.1400.  

 

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