Dollar Lower as Trump’s Feuds with Republicans Threatens Tax Plan

Dollar is trading generally lower, together with treasury yield, as weighed down by uncertainty over tax overhaul. Dollar index breached 94.14 resistance briefly last week but it’s now back at 93.30. Similarly, 10 year yield breached 2.396 resistance last week but is back at 2.345. On the other hand, Euro remains broadly firm as Catalonia risk has eased at least for now. EUR/USD is having 1.1832 near term resistance in sight. This level will be closely watched and break there will probably trigger steeper selloff in Dollar and spread to other pairs.

Tax plan’s fate uncertainty as Trump feuds with Republicans

Dollar and treasury yields are clearly weighed down by uncertainty over US President Donald Trump’s tax overhaul. The Republicans have done their job last week on passing a a spending 2018 spending blueprint. With that, the tax bill could be passed by simple majority vote in the Senate. As there are 52 out of 100 Republicans there, the Democrats could be bypassed. The tax plan looked to be on track to go through the Congress by the end of the year.

However, the situation is now complicated by the feud between Trump with Republican Senator Bob Corker, and also with Secretary of State Rex Tillerson. Trump’s attacks on the latters are, intentionally or unintentionally, alienating him from the people he should be relying on. And that also arouse concerns of other key lawmakers. With that thin majority, the tax plan could fail with just a few Republicans turning their back on it.

At the same time, the tax plan has drawn heavy criticisms for favoring the wealthy. And Trump seems to be trying to respond to those criticism and he said that "we’ll be adjusting a little bit over the next few weeks to make it even stronger." No information is released on what Trump will adjust. And, his Pres Secretary Sarah Huckabee just said that "the final piece of legislation hasn’t been finalized." And, "the framework is still the same."

IMF is not convinced by the tax plan neither

The International Monetary Fund lowered US growth forecast to 2.2% in 2017 and 2.3% in 2017, down from April’s projection of 2.3% and 2.5% respectively. IMF noted that "the downward revision relative to April forecasts reflects a major correction in U.S. fiscal policy assumptions." And it noted that due to "significant policy uncertainty", the passing of tax reform shouldn’t be counted on. Meanwhile, IMF chief economist Maurice Obstfeld also warned that "whatever the tax reform plan looks like, it should not increase the deficit." And over the medium term "tax reform should be revenue enhancing."

IMF projected global economy to growth 3.6% in 2017 and 3.7% in 2018, up from April projection of 3.5% and 3.6% respectively. Obstfeld also warned that "a closer look suggests that the global recovery may not be sustainable — not all countries are participating, inflation often remains below target with weak wage growth, and the medium-term outlook still disappoints in many parts of the world."

Risk of Catalonia fades for now

The risk of Catalonia independents seem to have temporary eased now. Catalonia’s President Carles Puigdemont proclaimed independence in his address to the regional parliament yesterday. But at the said time, he suspended form declaration immediately to allow for talks with the Spanish government. Spanish Prime Minister Mariano Rajoy will meet with his Cabinet today regarding the issue.

Brexit negotiation in slow pace

European Council President Donald Tusk warned that Brexit negotiation is have a "slow pace" and that "sufficient progress" hasn’t be reached. And if it continues like that, UK and EU "will have to think about where we are heading". UK Prime Minister May said earlier this week that they have to prepare for all eventualities, hinting on the preparing for a "no deal" Brexit. Chancellor of Exchequer, however, said that taxpayers’ money shouldn’t be spent on preparing for a "no deal". And he would not commit the cost for no-deal preparing in his budget.

On the data front

Australia Westpac consumer confidence rose 3.6% in October. Japan machine orders rose 3.4% mom in August. FOMC minutes will be the main feature in US session later today. Fed presidents Robert Kaplan, Charles Evans and John William are due to speak. At the September meeting, the Fed formally announced to begin balance sheet reduction in October, and affirmed that there would be one more rate hike this year in December

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.1754; (P) 1.1790 (R1) 1.1843; More…

Intraday bias in EUR/USD remains neutral with focus on 1.1832 resistance. Decisive break there will suggest that the correction from 1.2091 is completed at 1.1669, ahead of 1.1661 support. In that case, intraday bias will be turned back to the upside for retesting 1.2091 high. On the downside, break of 1.1669 will extend the correction to 1.2091 to 38.2% retracement of 1.0569 to 1.2091 at 1.1510. We’d expect strong support from 1.1510 to bring rebound.

In the bigger picture, rise from medium term bottom at 1.0339 is not finished yet. It’s expected to continue after pull back from 1.2091 completes. And, next target will be 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall from 1.6039 (2008 high) could resume. Hence, we’d be cautious on strong resistance from 1.2516 to limit upside.

Economic Indicators Update