US tax overhaul gaining support, effectiveness questioned

Senator Collins stated that it will vote the tax reform adding further assurance that the bill will pass. As certainty of reform passing rises, media reports suggest that scrutiny about the effectiveness of the tax reform also increases. Tax issues arise between federal government and individual states as loopholes are found in the proposed reform. On the international aspect of the proposed tax reform, worries seem to grow in the EU as it may influence US subsidiary businesses in Europe and have a wider impact on global tax rules and even financial stability should one consider the effects on the US deficit.

EUR/USD, yesterday Monday, during the Asian and European morning rose by 98 pips, broke the 1.1820 resistance barrier for a short period of time, and later surrendered some of its gains and continued to trade between the 1.1725 support level and the 1.1820 resistance level. Should the bears take the driver’s seat we could see the pair braking the 1.1725 level and aim for the 1.1680 support zone. Should the bulls take the reins again today we could see the pair break the 1.1820 resistance level again and aim for the 1.1880 resistance zone.

Is the US Dollar heading towards turbulence?

The FOMC interest rate decision is to be released today and the market widely expects a rate hike. Currently, fed funds futures suggest that traders priced in a 98.7% probability for an increase by 25 basis points of the current interest rate of 1.25%, reaching the 1.5% level. The arguments for such a rate hike are based on strong US economic data such as a reduced unemployment rate as well as favorable economic forecasts for growth. Since the rate hike is already anticipated by the market, focus may not be on the decision as such but on the statement accompanying the decision, the dot plot of the Committee and the following press conference. Any comments about the forecasts and the economic outlook for 2018 will gain on interest as it may enable the market to predict further rate hikes. Media reports and various analysts currently suggest three, some even four interest rate hikes in 2018. We see the case for the Fed to issue a rather optimistic statement, however we also recognize the possibility that the Fed may to opt to issue an optimistic albeit more neutral statement as it may currently want to retain flexibility in anticipation of the incorporation of the new tax plan into its models. As for the actual rate hike our opinion aligns with markets anticipation of a 25 basis points interest rate hike today.

On the political stage Democratic candidate Dough Jones won the special Alabama election for the senate. This result would shrink the Republican majority in the Senate for the tax overhaul to 51-49, meaning that, should only one republican switch sides the tax plan could be in jeopardy.

EUR/USD fell yesterday and briefly tested the 1.1725 support level only to rebound and continue to trade at previous levels. Should the bulls take the reins the pair could break the 1.1820 resistance level and test for the
1.1880 zone. Should there be any negative surprises in the FOMC decision or statement, the pair could break the 1.1725 support level test the 1.1680 support territory and even aim for the 1.1550 support barrier. As for today’s other economic data, In the UK, the unemployment rate and the average weekly earnings excluding bonus data for October will be released during the European morning. The unemployment rate is forecasted to tick down while average weekly earnings excluding bonus are expected to remain the same. Data gets increased attention as it is being released one day ahead of the Bank of England’s interest rate decision and one day after the release of the slightly increased inflation data and may influence the cable.

Cable experienced increased volatility yesterday as the inflation data were released. The pair remained within the lower support level of 1.3300, which it tested briefly and the higher resistance barrier of 1.3400. Should the bulls take the driver’s seat, cable could break the 1.3400 resistance level and aim for the 1.3455 zone, while should the bears take the reins the pair could break the 1.3300 hurdle and test the 1.3260. From Germany we get the final CPI and HICP data for November which are not expected to change since their last reading.

We also get Eurozone’s industrial production for October which is forecasted to accelerate. From the US besides the FOMC decision today we also get the CPI and Core CPI rates for November. The CPI rate is expected to accelerate on a year to year basis by 0.2% while the core CPI is forecasted to remain the same. These rates may gain on importance as they will be released ahead of the FOMC decision. Later on, crude oil inventories will be released and they are forecasted to have reduced, however on a lower amount than previous week.