Possible vote on taxes this week
The week opens with a mixed dollar as the Senate and House’s tax bills are finally combined and will likely be voted on as early as tomorrow. While the tally of the Senate vote appears a little unclear at the moment, the impact on the US economy and equities is in little doubt, especially with the confirmation that the cuts in taxes for US businesses will be imposed in 2018 as opposed to 2019.
While all this is positive for the dollar and global risk, other noises from the White House are more provocative. According to the Financial Times, President Trump will accuse China of engaging in “economic aggression” when he unveils his national security strategy on Monday.
As we outlined in our webinar last week on ‘What to Expect in 2018’, the greatest risk to world markets as we see it is an increase in anti-agnostic trade rhetoric or conditions between the US and China. Watch the recording here.
All the goodwill provided by the largest change in the US tax code since 1986 could easily be outdone by a seizure in global trade.
Christmas joy on Brexit and sterling
It could be the fact that this time next week will be Christmas Day, but sterling has opened the week positively. It is more likely to be a continuation of the feeling that some of the darkest clouds around Brexit may be starting to dissipate, channeling fears of delays and cliff-edges. Prime Minister May will address the Commons today to officially update Parliament on the progress of Brexit talks to Stage 2.
The key now for sterling is what happens around a transitional deal. Any agreement that allows the UK to remain a member of the single market and the customs union will be seen as a net positive for the pound and could drive GBPUSD as high as $1.40.
May will have a difficult job convincing the more extreme members of her party that a transitional deal is in keeping with a Hard Brexit. For now however, any deal that eliminates a cliff-edge on March 29, 2019, will see investors look on the pound more favorably.
The day ahead
Needless to say, this is going to be a quiet week with typical seasonal demand likely to drive investors into the USD through and over the multiple bank holidays that make up the Christmas period. That dollar demand will equalize in the first week of January, but we shouldn’t be surprised – alongside the possible vote on taxes – if the USD is a little stronger as we break for the holidays.
The data calendar is really quiet today.
Have a great day,
Jeremy Cook, Chief Economist