Back in early 2017, when dollar index reached its 14-year high, the markets were speculating about how good for the economy it is, when both the White House and the Capitol are controlled by the Republicans. This allows to adopt reforms, speeding up GDP, in the Congress fast. The following events showed that, in fact, the future of legislative initiatives depends on the whims of the single party. And if the reconstruction of the Health Care System enabled the critics to mock at Trump’s ability to fulfill his electoral promises and together with other factors caused EUR/USD growth up to the highest level since European QE start, than the fiscal reform implementation can make investors panic twice in the year.
The Senate, with 51 votes to 49, has approved the budget proposal, allowing the budget deficit growth by $1.5 trillion in 10 years. The reservation about reconciliation enables to adopt the tax code adjustment by a simple majority of votes. Considering that 52 out of 100 Senate members are the Republicans, it is only a formality. The Democrats can only resent that $1.9 out of $6 trillion of fiscal incentives will be gained by 1% of the richest households. The reform is for the rich, despite that Trump claims the opposite. However, it is more important for dollar where the money will go. It’d better be spent on consumption and wage increases. It will be worse if it is spent on creating bubbles in the financial markets.
Meanwhile, we should admit that the restart of treasury bonds yield race returned EUR/USD quotes back to figure 18 base. The markets has only started to speculate about euro resistance to the situation in Catalonia. There the separatists called their supporters for pulling down the banking systems by cash withdrawals, and Madrid issued an ultimatum to the region. It’s clear that EUR/USD bulls’ success was due to the uncertainty with the vote and Trump’s decision about the new Fed’ s chairperson. The first issue is almost solved, and the answer to the second one will have been known by November, 3, when the president’s trip to Asia is planned. According to bookmakers, the most likely candidate is Jerome Powell.
The chances of the candidates for the Fed’s chairperson
Source: Wall Street Journal.
According to Well Fargo research, Powell’s victory won’t influence the market at all. At the same time, the extension of Janet Yellen’s term of office will change the expected course of the federal funds rate. At the moment, the derivatives market expects it to be 1.7% by the end of 2018, which implies two monetary restriction acts in the next 14 months. And finally, if the Fed’s chairman is John Taylor, the rates difference between 10-year and 2-year bonds will reduce to 0.2 points within a few weeks; that will benefit to US Dollar.
To my mind, I still bet on “doves”; that will form a base for EUR/USD retracement. However, before the announcement of Trump’s decision, the factor of almost adopted tax reform can inspire bears to storm the support at 1.175. Will their third attempt be successful?
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