The dollar awaits approval of the tax reform in th… 20.12.2017

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The market is deciding whether the US economy is able to create conditions for three rate increases in 2018. In fact, this is the main reason for caution with which the bulls are on the dollar, which could not gather the strength to go on the offensive.

By the end of 2017, the recovery of the US economy has become more noticeable. The GDP growth rate is consistently higher than 3%, employment growth remains high, which looks rather surprising given the Fed’s own forecasts a year ago, expecting a drop in the rate of job creation to 60, 000 to 80, 000 per month.

The optimism of small business remains record highs, with the ISM index of business activity at six-year highs.

Exchange Rates 20.12.2017 analysis

The main obstacle to optimistic assessments is the weak growth rate of wages. The US economy needs to create higher inflationary pressures, otherwise justification for raising rates will not be enough. Perhaps, fiscal reform will support the labor market, as reducing the tax burden for businesses can slightly increase wage growth.

On Tuesday, the lower house of Congress approved the biggest tax reform since Ronald Reagan. The bill was sent to the Senate, and in case it is passed without delays in the upper house, it can be signed by Trump immediately. The reform involves tax cuts for corporations and for 95% of citizens, which can significantly reduce the fiscal burden at all levels of the US economy and support consumer demand.

Republicans intend to dramatically strengthen the competitiveness of American corporations. The extraterritorial principle of taxation will be removed for companies operating overseas, a tax amnesty for repatriated capital, a profit tax from 35% to 20%, and an excise tax of 20% on imported goods and services.

These measures should lead to a powerful wave of repatriation of capital back to the US. According to various estimates, it can be repatriate up to $ 2.5 trillion, which will be used for large-scale infrastructure projects.

Thus, much of today will depend on consideration of fiscal reform in the Senate. Successful passage of the bill can give impetus to a new wave of strengthening the dollar.

Of course, for each barrel of honey there is also a fly in the ointment. The reform will lead to the strongest budget loss, which will be closed by the growth of public debt. At the first stage, the Trump administration intends to reduce unproductive expenditures, including a number of social programs, and several provisions of the Medicare program will be used as a cut. It is expected that the collection of taxes will increase over time as the economy becomes more productive, but if this does not happen, then the growth of the national debt against the backdrop of rising rates will lead to a multiple increase in the cost of its services, which can eventually bury all such a wonderful plan.

These fears seem to be the main deterrent to the growth of the dollar, with too many cautious comments in the view that the US economy can not cope with such a large-scale reform.

On Friday, data on personal expenses and incomes will be published in November.

Exchange Rates 20.12.2017 analysis

Also on Friday data on orders for durable goods will be published. If the outlook is positive, the dollar can also get support.

Thus, the dollar has three factors that can move it towards growth and provoke a rally, but only in the short-term. It will be hardest for the currency to prove an advantage against the commodity currencies, supported by another attempt of oil to update the highs, but against the European currencies the dollar is able to complete the week with a confident increase.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Kuvat Raharjo,
Analytical expert
InstaForex Group © 2007-2017

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