The Song Remains the Same

The Song Remains the Same

No surprise the Fed is holding onto transitory inflation narrative, but given the recent tepid wage growth, it’s getting more difficult for the market to digest even more so after a softer core CPI print today. Which in itself is cause enough to sell dollars from my chair?

Also, and perhaps more significant for near-term dollar direction, the Fed believes the tax package will have little impact on growth or productivity which has sent the nascent tax reform dollar bulls packing. The bond market has been cautious of this all along, and it struck a chord again with bond desks  as  10Y  UST’s fall to 2.35 %  sending the USD spiralling down

Adding to the greenback woes, the Bama shocker will exponentially increase the risk for fiscal policy bottlenecks in the Senate which could substantiate the growing list of evidence arguing for a weaker USD in 2018. But this could present some near-term headwinds to US equity markets which could weight negatively on USDJPY.

As has been the case so often in 2017,  the perceived lack of progress on the Trump administration key policy, and a more dovish-than-expected Federal Reserve stoked demand for both JPY and EUR,  needless to say, so far today the song remains the same.

It’s hard to view the Alabama result in any other light than dollar negative as it lessens the likelihood of crucial legislation passing through an already shaky Republican margin of control in the Senate.

The market may be slow playing this hand assuming that tax cut will have passed before Doug  Jones is sworn in, so it’s of no immediate concern. However, as far as introducing other dollar affirmative policies in 2018, the narrowing of partisan battle lines, notwithstanding the fiscal hawks in the Republican Senate, will make it difficult for Republican lawmakers to introduce new legislation and add a higher degree of political uncertainty to the already deafening bluster coming out of Washington.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes