The US dollar and US equity indices soared yesterday following some comments from President Trump on taxes. Speaking to airline CEOs at the White House, Trump pledged to announce a "phenomenal" plan on tax reform within the next two or three weeks, in line with his pre-election promises to reduce taxes for American businesses. Although this was the only information we got, getting a timeline on the fiscal front was enough to reignite the market moves we saw following the election. We think that these movements could continue in the next few days, as the theme of tax and fiscal reform comes back under the market’s microscope and expectations build up further.

USD/JPY surged after it hit support once again near the 111.60 (S3) level to stop around 40 pips below the 114.00 (R1) hurdle. This is another sign that the decline started at the beginning of the year may have started to reverse and that the bulls could remain in the driver’s seat in the days to come. A clear break above 114.00 (R1) is possible to set the stage for more extensions, perhaps towards our next resistance of 114.80 (R2).

However, we would need to see the actual numbers with regards to tax cuts in order to determine whether we will see another USD rally similar to the post-election one, or whether investors discounted too much too soon. In the meantime, although our view for the greenback has shifted back to cautiously positive, there is still the risk of President Trump verbally intervening in USD, something he has done twice in the past few weeks. One occasion when he may deliver such comments is today, when he meets with Japanese Prime Minister Abe. Even though a US government official said that the issue of currency manipulation is not at the top of the meeting’s agenda according to a recent Bloomberg report, we would still be mindful of any potential comments with regards to USD or trade policy, considering that the US leader tends to be unpredictable.

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As for the bigger picture of USD/JPY, we still believe that the slide from 118.60 is just a corrective phase of the prevailing medium-term upside path, but we would like to see a decisive close above 115.50 (R3) before we assume that the aforementioned uptrend is back in force.

Today’s highlights:

During the European day, Norway’s CPI data for January will take center stage. The forecast is for the headline rate to have declined to +3.0% yoy from +3.5% yoy previously, while the core rate is expected to have ticked up to +2.6% yoy from +2.5% yoy. Considering that both rates are expected to remain above the Norges Bank target of 2.5%, we do not think that such a decline in the headline CPI rate will be particularly worrisome for policymakers. In fact, such a decline in the headline rate, combined with Norway’s very tight labor market may be a relatively welcome development for the Bank, as it could lead to higher real incomes for consumers, in our view. Bearing these into account, we believe that these data could support NOK overall.

In the UK, industrial output data for December are due out and expectations are for a slowdown. Nevertheless, such a slowdown appears more than normal to us following the astonishing surge in November, and we do not expect something like that to hurt the pound too much. We also get the nation’s trade data for December.

In Canada, the employment report for January will take center stage. The forecast is for the unemployment rate to have remained unchanged and for the net change in employment to have turned slightly negative. However, we see upside risks to the employment change forecast, perhaps for a positive number. We base our reasoning on the nation’s Markit manufacturing PMI for the month, which indicated that staffing numbers in the sector rose, and that the rate of job creation was the fastest since July. In case of a positive surprise, CAD could reverse some of its recent losses. Currently, USD/CAD is trading above the support barrier of 1.3100 (S1), but below the downside resistance line taken from the peak of the 28th of December. A positive employment report could bring the rate back below 1.3100 (S1), something that could open the way for our next support of 1.3050 (S2). Another dip below the latter obstacle could lead to a test near the psychological zone of 1.3000 (S3).

Besides US President Trump and Japanese PM Abe, we have two more speakers scheduled for today: ECB Governing Council member Jens Weidmann and ECB Executive Board member Yves Mersch.

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