The U.S. dollar held on to most of its gains from late last week overnight, but is slightly weaker against the Euro.
The dollar found support from events abroad last week, but also received a boost as the GOP cleared some hurdles that make tax reform more likely to pass. House Ways and Means Chairman Kevin Brady is expected to unveil the tax bill on Wednesday. President Trump has promised that middle-class Americans will be the biggest beneficiaries of the tax overhaul. Opponents see this as unlikely as it is expected the proposal will reduce corporate tax rates and may take deductions popular with middle-class Americans to help pay for shortfall from corporate tax cuts. Expect fierce debate from both sides over the coming week. Tax reform is seen as a dollar-positive initiative.
Traders will also keep an eye on other developments in Washington as special counsel Robert Mueller’s investigation has his first indictments in the investigation into Russian meddling in the American elections. While the investigation is unlikely to directly affect currency market, it could be a distraction to getting a tax deal done.
President Trump is also expected to announce who will lead the Federal Reserve after Janet Yellen’s term expires. Speculation is that the president is leaning towards Jerome Powell, who is the more dovish of the potential picks.
This morning’s economic docket registered in line with expectations so has not sparked any extra volatility. Personal income rose 0.4% in September and personal spending grew 1.0%, slightly beating expectations of a 0.9% gain.
The Euro is in recovery mode this morning after falling 2.0% on Thursday and Friday of last week. The Euro slipped last week after the European Central Bank announced tapering of its quantitative easing program but extended the program longer than some expected. Political risk has subsided somewhat after the Spanish government dissolved the Catalan government and called for new elections. The turmoil over Catalan independence is far from over but has fallen out of the spotlight for the time being.
The British pound was mostly unchanged and we expect little movement before the Bank of England’s interest rate decision on Thursday. Strong data released last week all but solidified expectations that the BoE will hike interest rates a quarter point this week. However, we will be looking closely at how the central bank members voted. It is our expectation that policy makers will vote 5-4 for a hike, indicating the move will be a one-off event instead of the start of a rate-hiking cycle. Until Thursday morning, expect GBP/USD to hold a tight range.