Today, the market spotlight will be on the US, where President Trump will address a joint session of Congress. This speech is widely anticipated by market participants, primarily because Trump indicated a few weeks ago that he is going to announce a "phenomenal" tax plan soon, and this looks like the perfect occasion to do so. However, following his latest comments on Monday, we think that investors looking for concrete details on tax reform may be sorely disappointed. He stated that his administration’s first budget will not include tax changes, and that his tax plan details will be released only after he develops a proposal to replace Obamacare. That does not mean this Congressional address is going to pass unnoticed though. He also said that his speech will include a "big" statement on infrastructure spending, something that has the potential to prove a market mover for both the dollar and US equities. Some clarity on the issue of government spending, such as the potential size and/or timeline of any massive infrastructure plan, could cause the dollar to regain some of its lost glamour as the themes of fiscal expansion and reflation come back into play.
USD/JPY rose yesterday following Trump’s remarks that he is going to announce something "big" today, breaking above the resistance (now turned into support) level of 112.40 (S1). Then, the pair found fresh sell orders near the crossroad of the 113.00 (R1) resistance territory and a short-term downtrend line taken from the highs of the 15th of February, and subsequently, it retreated somewhat. During the early European morning Tuesday, the price looks to be headed for another test near 112.40 (S1) as a support this time. In case Trump’s comments deliver some clarity regarding the government’s future spending plans, the rate could surge. A clear break above the 113.00 (R1) resistance barrier could initially aim for the 113.50 (R2) zone.
On the other hand, a more vague speech that does not include clear details or numbers around infrastructure spending, could lead to downside correction in the greenback. In such a case, an initial break in USD/JPY below the 112.00 (S2) support hurdle, could set the stage for further downside correction towards the 111.60 (S3) level.
Another point of interest for investors, may be any specifics regarding the prospect of a one-time repatriation of corporate cash held abroad at a discounted 10% tax rate, a central theme of the President’s campaign. A confirmation of that could boost the dollar as well.
Today’s highlights
During the European day, there is not much on the economic calendar. The most noteworthy indicators we get will be Sweden’s GDP for Q4 and retail sales for January. GDP growth is forecast to have accelerated from the previous quarter, while retail sales are expected to have rebounded on a monthly basis. Such prints would probably be pleasant news for the Riksbank, and could diminish somewhat the likelihood for any further easing, at least in the near-term. Something like that could reverse some of SEK’s recent losses.
With regards to the US data, we get the 2nd estimate of Q4 GDP. Expectations are for economic growth to have been revised upwards, albeit slightly. This would likely be encouraging news for FOMC policymakers, who in their February policy statement noted that economic activity continued to expand at a moderate pace. Sustained strength in US economic data could bring forth market expectations regarding the timing of the next Fed hike, and thereby support the dollar somewhat, though the main market focus will be on Trump’s speech. EUR/USD surged yesterday, breaking above the 1.0600 (R1) barrier and a short-term downtrend line taken from the 6th of February. Then the rate hit resistance near the 1.0630 (R2) hurdle and pulled back below the 1.0600 (R1) territory and the aforementioned downtrend line. In case of an upward GDP revision today and optimistic comments from President Trump, the latest pullback in the pair may continue. If the bears manage to overcome the 1.0550 (S1) support, we could see further declines towards the psychological 1.0500 (S2) area. We also get the Chicago PMI and the Conference Board consumer confidence index for February, as well as the S&P/Case-Shiller house price index for December, though none of these indicators is usually a major market mover.
As for the speakers, prior to his Congressional address, US President Trump will also appear in a televised interview. Besides Trump, we have one more speaker scheduled for today: San Francisco Fed President John Williams.
