US Tax Uncertainty Hammers Dollar

Republican House and Senate tax plans differ

The US dollar depreciated against majors in a week that had few economic indicators for investors to digest and left the market speculating about the chances of a US tax overhaul and the impact of the developments in Saudi Arabia over the weekend. The week of November 13 to 17 will bring to light important data releases. Inflation figures from the United Kingdom, the US and Canada will be the main events.

The UK’s Office for National Statistics will release the consumer price index (CPI) on Tuesday, November 14 at 4:30 am EST. The rise of inflationary pressure prompted the Bank of England (BoE) to hike rates for the first time in a decade. UK inflation is expected to come in at 3.1 percent in October.

The US Bureau of Labor Statistics will publish the change in consumer prices on Wednesday, November 15 at 8:30 am EST. At the same time the US Census Bureau will release the monthly retail sales data. Core inflation is forecasted to come in at 0.2 percent on a monthly basis adding up to a 1.7 percent year to year comparison. Core retail sales are expected to have gained 0.2 percent in October.

The EUR/USD gained 0.51 percent in the last five days. The single currency is trading at 1.1667 after a week of few economic data releases leaving the market to value the impact of political events. The US tax reform that at one point had revived the USD rally is slowing down hard with doubts rising on the ability of Republican lawmakers to turn the proposal into legislation.

The USD had risen more than 4 percent against major pairs in September, but has slowly given some of those gains back as the Republican House and Senate proposals diverge with little time to hammer the differences.

The economic calendar in Europe will be quiet leaving the attention of the market to focus on inflation in the UK and the US. The U.S. Federal Reserve is expected to raise rates at the end of its December meeting, but the move has already been priced in. Strong signs of US inflation would keep the rate hike on the table and give some momentum to Jerome Powell’s term at the head of the central bank when his term begins in February.

The GBP/USD gained 1.03 percent this week. The currency pair is trading at 1.3211 and gained 0.39 on Friday alone after the UK manufacturing production and goods trade balance releases. The ONS published a 0.7 percent gain of monthly manufacturing gain beating expectations of a 0.3 percent rise. The balance of imported versus imported goods in the UK shrank for the first time in 5 month. The weakness in the pound has helped boost the manufacturing numbers as exports also become more competitive.

Softer Brexit hopes rose on Friday as EU chief Brexit negotiator Michel Barnier issued comments on the possibility of trade talks still happening in December. The divorce between the EU and the United Kingdom is slowly inching forward, but with little progress on an amicable split. Adding drama to the proceedings the author of Article 50 Lord Kerr, a former UK ambassador to the European Union suggests that there is still a chance to withdraw the bill. With Theresa May’s hold on the conservative party weakening these comments will not help her cause. Although she supported to Remain in the EU, the fact that she was victorious in a Prime Minister race in the aftermath of the referendum.

The Bank of England (BoE) hiked rates by 25 basis points to 0.50 percent on November 2 under pressure from inflation who sits at 3 percent, when the target from the central bank is 2 percent. The bank remains concerned about the potential fallout when the UK leaves the European Union, but it is limited in what it can actually do to shore up the economy. The release of the UK inflation data next week will be the focus of pound traders as they keep monitoring the ongoing Brexit saga for any potential downside risks.

The price of oil remains above the $56 price level on Friday. West Texas Intermediate surged on Monday after the news of the arrests of influential princes and politicians were made public. As part of a corruption sweep ordered by the Saudi Crown Prince Mohammed bin Salman. The prince has quickly landed on the global scene and has been the driving force behind the biggest initiatives at the Organization of the Petroleum Exporting Countries (OPEC) but also the aggressive diplomatic style putting an embargo against Qatar.

Political uncertainty in one of the world’s largest producers of oil has taken prices higher. The price has been kept in a new range given the ample supply still in existence. US weekly inventories showed a surprise buildup on Wednesday. The price of West Texas has been stable at the new trading range and will be sensitive to additional information on the Kingdom’s future.

Market events to watch this week:

Monday, November 13
9:00pm CNY Industrial Production y/y
Tuesday, November 14
4:30am GBP CPI y/y
8:30am USD PPI m/m
Wednesday, November 15
4:30am GBP Average Earnings Index 3m/y
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
8:30am 10:30am USD Crude Oil Inventories
7:30pm AUD Employment Change
Thursday, November 16
4:30am GBP Retail Sales m/m
8:30am USD Unemployment Claims
Friday, November 17
8:30am CAD CPI m/m
8:30am USD Building Permits

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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