The greenback has been rallying strongly over the last two days amid building expectations the Fed will hike the federal fund rate target by another notch in December together with expectation Donald Trump will finally pass his tax reform, which aims mainly at lowering the corporate tax rate from 35% to 20% and capping the one for individuals to 35% from 39.6% among other specifics.
The US dollar surged across the board, adding gains against most of its peers, gaining the most against the pound sterling, the Swiss franc and the Japanese yen, rising 0.52%, 0.51% and 0.43% respectively. According to the probability extracted from the Fed funds futures, the probability of a rate hike in December has risen to 70%, compared to 63% a week ago.
The greenback also got a boost from Donald Trump amid an announcement made on Wednesday about a proposed tax rate cuts plan. Beside the tax cuts for individual and corporation, the proposal also mentioned an increase of the bottom tax rate to 12% from 10% currently, and also the eventuality of a higher tax rate for wealthy individuals. It seems that this tax cut plan will find a larger support among Congress members as its overall effect will be more balanced compared to what the Donald has proposed so far.
We were advocating, for quite some time now that the USD was oversold and that the time was coming for a recovery. It seems that the time has finally come, especially against currencies that profited extensively of the USD weakness. Currency such as the AUD, AUD and EM in general are subject to a potential broader correction.