Dollar looks to recover with Trump’s tax plan back in play

With the dollar back into recovery mode and now looking towards a crossroads of what would be a significant change in outlook, US inflation could be the trigger. The weakness of the dollar throughout 2017 has been on the disappointment of Trump’s failure to achieve tax reform or fiscal stimulus, but also the concerns over subdued US inflation. The expectation for a Fed hike in December have been seriously questionable however if these two key factors of tax reform and US inflation that have driven dollar weakness can be turned around, then the dollar may be able to drive a sustainable recovery. The intraday dollar turnaround yesterday came on the suggestion that the Republicans were preparing a tax reform package. This helped to lead Treasury yields back higher, with the 10 year yield back towards 2.20% and a key technical downtrend being tested. With the 2s/10s spread rising again (suggesting a steepening yield curve) the dollar has strengthened again. There will be a key test of this recovery today with US CPI inflation. Yesterday’s PPI (factory gate inflation) disappointed expectations and the CPI is expected to drop back on the core data today. However, a positive surprise could drive a further recovery in yields and the dollar. There is also a focus on the UK with the Bank of England monetary policy. Issues to consider are whether a third MPC member votes for a hike (possibly Andy Haldane) and whether the statement strikes a more hawkish tone given the recent rise in inflation.