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Greenback Turns Bullish Against Pound, Euro

The weak US core inflation data and soft GDP growth outlook issued by the Fed has turned the greenback weak against the Euro and the Pound. The October industrial production growth of 0.2% in the Eurozone and a 1.1% m-o-m growth in the UK retail sales in November also assisted the euro and pound to remain strong against the US dollar. However, as explained below, a series of positive economic data from the US, reported yesterday, and the tax reform bill, which is near certain to be passed in the House of Representatives and the Senate, has turned the US dollar bullish.

The euro is on track to post its best performance since 2004, against the US dollar. Year-to-date, the currency of the 19-member bloc has appreciated nearly 12% against the greenback and is only about 3% away from the 2-1/2 year high of nearly $1.21. In January, traders and analysts were discussing about the possibility of the euro-dollar parity. However, a recovery in the Eurozone economy has turned the euro currency bullish, while the US dollar turned bearish after the Trump admin failed to repeal the Obamacare bill.

Now, the Republican-controlled US Congress is on course to pass the tax reform bill in the next few days. Sensing a big legislative victory for Trump, the US markets has turned extremely bullish. Analysts have already started making assessments of the probable increase in the profits of multinational companies having head-quarters in the US. On average, analysts expect companies to record a 10% increase in profit, with a maximum of 30% in some cases. Oil refiners, airlines, railroads, and banks are expected to be among the biggest beneficiaries of the cut in tax rate from 35% to 21%. Notably, Delta airline has already announced that it will see an 18% to 19% increase in profits in 2018. As repatriations to the US increase, the dollar could rise in value.

According to the US Census Bureau, building permits, a proxy for future home constructions, declined to 1.30 million in November, from 1.32 million in the previous month, but surpassed analysts expectation of 1.27 million. Similarly, the number of housing starts in November increased to 1.30 million in November, from 1.26 million in the earlier month, and exceeded analysts’ expectations of 1.25 million. It is the strongest pace of growth in a decade.

On the fiscal front, the Bureau of Economic analysis reported a decline in the current account deficit to $101 billion in 3Q17, from a deficit of $124 billion in 2Q17. Analysts had expected a deficit of $116 billion.
While the above facts are expected to turn the greenback bullish, the pound is expected to weaken after a strong rally in November. The exhaustion is already seen in the charts. Further, the postponement of trade talks between the EU and UK to March has already created doubts of a disorderly exit of the UK from the EU in 2019.

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Likewise, a decline in the German Ifo Business Climate index reading to 117.20 in December, versus analysts expectation of 117.6, has turned the euro weak. In November, the business outlook index, which is based on a monthly survey of 7,000 firms, recorded an all time high of 117.6.

Thus, US tax reforms and upbeat economic data are expected to turn the greenback bullish against the pound and euro.

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