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.
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