Hurdles to Tax Reform Bill Keeps Greenback Under Pressure

Hurdles to Tax Reform Bill Keeps Greenback Under Pressure
December 4, 2017

 
The US economy bounced back strongly after the devastation caused by the hurricanes Harvey and Irma. That pushed the US dollar upwards against its G10 rivals such as the Yen. The strong rise of the Nikkei index also weakened the Yen, which has an inverse correlation with the Japanese stock market. However, we anticipate a decline in the USDJPY pair, which is trading at 112.30, due to arguments presented below.

The minutes of the Federal Reserve monetary policy meeting, held earlier this month, indicated that several members of the rate setting committee (FOMC) wanted to see a further rise in prices, before raising rates again in 2018. If the inflation does not pick up soon, then there will be no need for the Fed to raise rates in 2018.

In the US, the Republicans managed to pass the tax reform bill in the Senate, despite severe opposition from the Democrats who felt that necessary time was not given to read through the 500-page document. The lawmakers made several last-minute changes to pass the bill through the Senate on early hours of Saturday. Two days earlier, the Democrats tried to send the bill back to the Finance Committee for a review.

The joint committee on taxation had forecast that the plan would add $1 trillion to the Federal deficit over the next 10 years. The bill is now expected to go to conference committee. The conference report, passed by the members in the conference committee, has to be passed again by the Senate and House. After that, it would be sent to the President’s desk. Senator Susan Collins wants two of the Obamacare stabilization bills to be passed before voting begins on the tax bill. However, there may not much time left for that before Christmas. Thus, investors would be waiting for the bill to be enacted into a law before buying the Greenback.

In the meanwhile, the Yen is showing signs of strengthening due to two reasons. Firstly, the latest missile test by North Korea has once again increased the demand for safe haven assets. Secondly, the Japanese economy is all set to record a growth rate of 1% this year. That has led to an expectation of a rise in the inflation rate. It should be noted that for the first time in several decades the Yen does not weaken when the Nikkei is rising. That has puzzled investors who used to take advantage of the inverse correlation between the Yen and the Nikkei Index, which reflects the state of the Japanese economy. Thus, political developments keep the US dollar under pressure, while improving economy and demand for safe haven assets are strengthening the Yen.

The USDJPY pair has closed below its 50-day moving average, after facing resistance at 112.70.The RSI indicator has fallen below the reading of 50. That indicates weakness in the USDJPY pair. Thus, we can expect a downtrend to begin this week.

USDJPY - Technical Analysis - 4th December 2017

In order to gain from the downtrend, we are planning to go short in the USDJPY pair near 112.60, with a stop loss order above 113.40. The short position will be covered near 109.60.

As an alternative, we may invest in a put option as well. In order to open a trade, the contract offered by a binary broker should remain active for a period of one week, while the strike price should be around 112.60.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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