Daily Market Update

Markets on Edge Ahead of Tax Reform, Fed, Tier-One Data

October 31, 2017

The U.S. dollar was mostly flat overnight as it settles into new, stronger ranges against most of its counterparts.

USD

However, this week is still full of risk events that will likely cause volatility. Today’s economic docket is light but news surrounding the intensifying Russian interference investigation may have a knock-on effect on the GOP’s tax reform plans. The tax reform bill is expected to be released tomorrow and we can expect intense political battles between now and Thanksgiving.

President Trump has said he will announce his choice to replace Janet Yellen as head of the Federal Reserve on Thursday. Numerous news outlets are reporting that Trump has decided on Jerome Powell, the least hawkish of the finalists. It is our view, that Powell will be seen as an extension of Yellen and will not drastically change the outlook for future interest rate policy. In short, he is a safe, solid pick.

The week really picks up tomorrow. In addition to the introduction of the tax reform bill, the Federal Reserve will meet about monetary policy. While there is no chance the Fed will announce a rate hike, we will be looking for signs as to the Fed’s thinking for December. Currently there is an 83% chance that the central bank will boost rates in December according to the Fed Funds Futures.

Tomorrow also see the release of ADP private jobs data, which may foreshadow the reading for Friday’s Non-Farm payrolls print.

EUR

EUR/USD traders were able to focus on fundamental data as the Catalonian independence bid seems to have lost steam. Catalonian President and other officials have fled to Belgium and are seeking asylum as they face rebellion charges.

The Euro was pulled in opposite directions overnight as strong GDP was offset by low inflation. Eurozone GDP rose 2.5% y/y in the third quarter, beating expectations. Unemployment fell to 8.9%, the lowest since 2009. However, inflation slowed and core inflation fell under 1.0% y/y.

GBP

The British pound remains at a standstill as markets appear frozen ahead of Thursday’s Bank of England meeting. It is almost a foregone conclusion that the central bank will raise rates 25 basis points as inflation remains elevated. However, we believe that there may be more downside risk to the sterling over the medium-term. It is likely that Thursday’s rate hike will be a one-off rate hike, and not the beginning of the rate-hiking cycle. However, if more than five policy makers vote for a hike, our hypothesis could be proven wrong. Either way, expect quiet levels until Thursday morning where we might see some fireworks.

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