Dollar in tight ranges as FOMC looms
First it is probable that President Trump’s fiscal reform plans will finally be passed by Congress today although the outcome of the vote is not certain. The President has invested a great deal of time and his flimsy credibility in providing his supporters with the tax regime he promised in his campaign. This has taken an interminable time to pass through Congress but now Trump can provide greater detail on his economic plans which will be the highlight of his 2018 legislative agenda.
The second major influence on the dollar has been inflation and its effect on the prospect of a rate hike later this month. The replacement of Janet Yellen with Jerome Powell as Chairman of the Federal Reserve has clouded the prospect a little more. Powell is more pragmatic that Yellen wanting to see empirical evidence of inflation before acting where Yellen was more proactive willing to be swayed by future expectations. Traders are still discounting a rate hike at the 14/15December FOMC meeting and it would be a major surprise if they didn’t act.
Sterling rallying as Short Positions trimmed
In the recent past, traders have been unwilling to act on rumours of a breakthrough in Brexit talks as they have been let down one too many times in the past. They do, however, still believe that common sense will prevail, and a deal will get done. That is why the pound has rallied this week as the U.K. has apparently offered to more than double its previous financial offer and there is a rumour of a deal over the Irish border.
So much has been made of the budget proposals that the Irish border had been ignored. However, as is often the case, these things came back to haunt negotiators. The issue is that Dublin has said it will veto any deal that includes a hard border and the Unionist majority in the North could withdraw its support from Theresa May’s minority Government if it feels that London has been too accommodative to the Republic.
The pound broke above 1.3500 against the dollar for the first time since late September and has been making steady progress this week against the common currency reflecting the renewed optimism over a Brexit deal. Similarly, to the U.S., December is likely to be a seminal month for Sterling with the EU Heads of Government Summit and the release of pivotal inflation data taking place in week three.
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Euro rangebound as influences wane
For the single currency, November was dominated by the prospect of fresh elections in Germany as Angela Merkel tried and failed to form a coalition Government with the support of the pro-business Free Democratic Party and the Greens.
It became clear that the German President was concerned about fresh elections providing both a platform and an increase in support for the far-right AfD Party. This led him to coerce the SPD, who have been part of Merkel’s Grand Coalition during all her twelve years in office, to reconsider their decision to leave Government and stand alone. Talks are ongoing about the formation of a Government, but the leader of the SPD Martin Schulz is likely to be extracting every possible concession from Mrs Merkel to agree to “come back into the fold”.
The Euro has been drifting recently with no fresh drivers to provide direction. The policies of the ECB are well established and macroeconomic data is supportive.
As the end of the year approaches there is unlikely to be any major change in the recent range with resistance at 1.1980 proving tough to break but buying interest around 1.1740 providing support. It remains to be seen how the euro will fare in 20158 having seen a close to 20% rise versus the dollar this year.