The U.S. Senate's approval to pass the tax cut bill on Saturday overshadowed the continuing investigation into connections between U.S. President's inner circle and Russia. The U.S. dollar rallied across the board with most gains seen against the Yen which fell to a two-week low early Monday. U.S. 10-year treasury yields rose above 2.4% after falling 10 basis points on Friday. Although it does not appear that investors' optimism will send yields towards 2017 highs, if the yield curve manages to steepen further in December, we are likely to see more inflows to the U.S. dollar. This would largely depend on how talks between the Senate and the House develop in the weeks ahead, but with the government shut down looming, there's likely to be some noise in currency markets.
Brexit talks resume
Sterling is the only major currency treading water against the dollar on growing confidence that Brexit negotiations will move to a new stage when E.U. leaders meet in mid-December. Numerous reports last week indicated that the U.K. is getting closer to announcing a divorce bill that will lead to significant progress in Brexit talks. Today's meeting between Theresa May, Jean Claude Junker and Michel Barnier will provide an early indication of whether the U.K. is getting closer to negotiating trade deals. The three main barriers to overcome are the Brexit divorce bill, Irish Border and E.U. expatriates' rights. Significant progress on this front will likely push Sterling higher -to retest 2017 highs at 1.3656.
It is the non-farm payrolls week
The Federal Reserve is expected to continue tightening monetary policy by raising rates another 25 basis points on 13 November. Given that a final rate hike is already priced in, the trajectory in 2018 remains unclear given the uncertainty towards the fiscal progress and inflation path. Friday's non-farm payrolls will be the final jobs report released in 2017 and will help the Fed assess whether inflation is likely to strengthen next year. Nonfarm payrolls are expected to have increased by 198,000 in November, after climbing by 261,000 in October. According to Thompson Reuters, the key figure traders should focus on, is wages which have been the missing ingredient throughout this year. An increase in wages of 0.4% or above, will support the central bank's argument that low inflation should be attributed to temporary factors, and this should provide a further lift to the U.S. dollar.