US Dollar plummets to multi-week lows below 94

  • Tax plan uncertainty continues to weigh on the greenback.
  • Falling US T-bond yields increase the pressure on the DXY.
  • Wednesday's inflation and retail sales figures will be looked upon for fresh impetus.

Following Monday's choppy trading action, the US Dollar Index, which tracks the greenback against a basket of six trade-weighted peers, came under a heavy pressure on Tuesday as robust data from the euro area allowed investors to get rid of their long USD positions. After dropping to its lowest level since October 26 at 93.64, the DXY went into a consolidation phase and had been moving sideways in the last hour. As of writing, the index was at 93.70, losing 0.75% on the day.

The uncertainty surrounding the details of the final version of the highly-anticipated tax reform and the timing of its legalization seems to be the primary reason behind the index's and the T-bond yields' fall on Tuesday as investors ignored the robust macroeconomic data from the U.S. At the moment, the 10-year T-bond yield is losing nearly 1% on the day. The PPI growth on a monthly basis in October came in at 0.4%, surpassing the market estimate of 0.1% and ramping up the expectations for consumer inflation expectations. 

In the meantime, speaking at an economic forum in Montgomery, Alabama, Atlanta Fed President Raphael Bostic said that the economic activity was reasonably solid in recent months and added that he was in favor of continuing to raise interest rates gradually over the next couple of years. Nonetheless, Bostic's comments failed to help the buck retrace its losses against its rivals.

On Wednesday, the US Bureau of Labor Statistics is going to releases the CPI data, which is expected to ease to 2% from 2.2% on a yearly basis in October. A higher-than-expected reading could help the greenback find demand as it would affirm another rate hike in December. However, politics are likely to remain the primary catalyst for the DXY.

"Fiscal policy, i.e., tax reform is overshadowing monetary policy at the moment.  The House seems to be moving toward a vote later this week, even though there may still be some last-minute adjustments.  President Trump is expected to address the House Republicans before the vote.  Judging from the tweet storm, POTUS wants the bill to include a repeal of the individual mandate for the Affordable Care Act and wants to cut the top tax rate,” BBH analysts explained in a recent report.

Technical levels to consider

The index could encounter the first technical support at 93.35 (Oct. 26 low) ahead of 92.60 (Oct. 13 low) and 92 (psychological level). On the upside, resistances align at 94.45 (daily high), 95 (psychological level) and 95.60 (Jul. 14 high).

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