After a promising start into the week, the greenback is back in the doldrums as investors scale down their long USD positions. After rising as much as 0.75% during the week, the dollar index reversed gains and returned at around 92.80 on Friday morning. A couple of month ago, everything was looking good for the greenback as Trump’s tax reform finally started to move forward, the Fed started to reduce its giant balance sheet and signalled a rate hike in December, while economic indicators came in roughly in line with market expectations.
However, it looks like investors are still disappointed regarding developments with the US tax reform and the last batch of economic indicators. The economic agenda was quite busy this week. The first revision of the third quarter GDP was revised higher to 3.3% (q/q annualized). The downward revision in personal consumption (2.3% vs 2.2%) killed off the enthusiasm. Still on the positive side, the last inflation figures were also in line. The Fed’s favourite measure of inflation, the core personal consumption expenditure, remained steady at 1.4%y/y in October, while the headline gauge edged lower to 1.6%y/y from 1.7% in the previous month.
On the political side, the US tax reform is facing difficulties in the Senate. Even with a small majority in the upper chamber, Trump is struggling to get the required numbers of vote to pass the bill. Investors manifested their disappointment by trimming their long USD positions.
Looking at the positioning of speculators, data reported by the CFTC showed that non-commercial short USD positions have increased slightly over the last few weeks. More specifically, speculators remains bullish EUR/USD. We also believe that there is plenty of room for further euro appreciation, especially against the dollar. Positive economic developments together will a “tightening” of monetary policy conditions were encourage investors to reallocate their capital on the other side of the Atlantic.
By Arnaud Masset