The U.S. dollar enjoyed minor gains against most of its European counterparts overnight, but fell versus the Aussie, Canadian and New Zealand dollars.
There has been no major news surrounding the tax reform bill which is now in the reconciliation process. However, some unintended consequences of the bill are starting to come to light which may affect the outcome but are already affecting equity markets. While U.S. stocks rose broadly yesterday, technology stocks sank to a five-week low because the bill may have “unwittingly created a situation where tax breaks related to intellectual property and capital spending would be rendered worthless,” according to Bloomberg News. The situation is fluid and the greenback will be susceptible to headline risk.
A report this morning showed that the U.S. trade deficit widened in October to the most in nine months. However, imports climbed 1.6% showing a steady domestic demand which may bode well for the U.S. economy. Later this morning, both Markit and ISM will release their service sector data for November. Both are expected to show healthy grow so their overall effect might be limited. The week’s main risk event remains non-farm payrolls on Friday morning.
The EUR/USD pair remains mostly quiet to start the week. The Euro did take a small tumble in early trading on the back of mixed Eurozone data. Overall Eurozone PMI reflected better-than-expected growth in Italy and France, but slightly weaker growth from Europe’s largest economy, Germany. A separate report showed that Eurozone retail sales fell 1.1% in October, failing to meet an already dire expectation of a 0.7% decline. Expect the Euro to remain out of the spotlight as news from the U.S. tax bill and political wrangling in the U.K. dominate the headlines.
The British pound fell across the board and is headed for its biggest decline in three weeks against the U.S. dollar as the Irish border issue remains unresolved. The sterling gained early yesterday in anticipation that Prime Minister Theresa May would be able to hash out a deal with the EU Commission President. But the pound quickly reversed those gains after news broke that no deal was reached. Adding salt to the wound, the Northern Ireland’s Democratic Unionist Party, a May ally, rejected any special status after Brexit. The step backwards caused the sterling to drop.
Negotiations will now be pushed back to the December 14-15th summit between Britain and the EU, so expect the GBP/USD pair to be in flux until this time.