The US dollar is in a depressed state after disappointing news about the prospects for tax reform. The offensive of the White House failed, and the legislative initiative got blocked due to inconsistency of the Republicans in the two chambers of Congress. If the worst assumptions of traders are confirmed, then key changes in tax legislation will be implemented in 2019, or maybe later than the said period.
The probability of this scenario is quite high, given the caution of the senators and the falling rating of Donald Trump. Congressmen are unlikely to want to take on full responsibility of realizing the president's ambitious plans. In any case, the discussion process will drag on for several months, and the final version of the bill may radically differ from Trump's original proposal.
Thus, the dollar loses one of its most powerful cards. Measures of fiscal stimulus could lead to acceleration of inflation growth and more aggressive rates of tightening of monetary policy. Now this scenario will have to be postponed for a prolonged period of time and focus will be on other fundamental factors.
However, the focus of traders is still inflation. This indicator is key for determining the future policy of the Fed. The December meeting of the Fed is not in the main point of discussion- the question of raising the rate by 25 percentage points is already predetermined and is unlikely to be revised, even if inflation goes to the negative area.
The market is already living in 2018, assessing the odds of a triple increase. This has already become a kind of tradition: at the end of 2015, the regulator hinted at several increases over the following year (the forecast was not justified, the rate was raised only once a year later). In 2017, too, there were ambitious plans that were practically realized (a year ago, many expected four rounds of rate hikes).
If inflation is being discussed, then in the period of October-December in 2016 it was 1.6-2.1%, showing moderately stable growth dynamics. This year the dynamics was wavy: after reaching a high of (2.7%) in February, the consumer price index gradually decreased to 1.6% (June), after which it resumed growth to the current 2.2% in annual terms. On a monthly basis, the growth trend was much weaker. In May, the CPI fell into a negative area, after which the index began to recover slowly, reaching 0.5% in September (below the forecast level). Despite the positive dynamics, there is no sign of sustainable growth. Moreover, data for October, most likely, also can not support a positive trend. According to the published average forecast, the indicator will drop to 0.1% on a monthly basis and 2.0% on an annualized basis.
Here it is worth noting that the level of average wages in the US declined in September to zero. This indicator is closely monitored by the Fed, using it as a measure of inflationary pressures in the country. Its reduction is an alarming signal in the context of inflationary trends.
In other words, tomorrow, the consumer price index has all chances to "slide" into the negative area on a monthly basis and go below the 2% level in annual terms. It should be reiterated that these figures will not affect the December rate increase, but this fact has long been taken into account in prices. Therefore, the market reaction to the negative CPI is likely to be strong, especially against the backdrop of the position of Jerome Powell, who at the beginning of next year will head the Fed.
Powell repeatedly underlined the weak inflation, calling for a gradual tightening of monetary policy. Now that he has practically received a leading position, his comments was by no means tougher - he remained adherent to a cautious approach. Moreover, he unexpectedly criticized the practice of the average yearly forecast (Dot Plot). According to him, this tool is ineffective, whereas a dynamic consensus forecast on the "if-then" formula will be more informative and relevant. This comment was neutralized by the market, although, in my view, this suggests that Powell will not blindly copy Yellen's policy. In turn, this again demonstrates the importance of inflation dynamics, as well as the fact that the potential successor to the head of the Federal Reserve pays special attention to this indicator.
Summarizing the discussion above, the following is noted. The US consumer price index tomorrow may again disappoint the market, thereby keeping the pressure on the dollar. This pressure will only increase against the background of uncertainty with the tax reform. Such a scenario will be relevant even if the CPI is released at the forecast level. If the indicator collapses into the negative zone, greenback will significantly fall in price throughout the market.
Directly paired with the European currency, it is important for the dollar to be kept below the level of 1.1715. When fixed above this price, the indicator Ichimoku Kinko Hyo will form the signal "Golden Cross", which will indicate the trend change. In this case, the price increase can be continued to the levels of 1.1815 and 1.1875 (the lower and upper limits of the Kumo cloud on the daily chart).