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US dollar strength continues with tax reform still key

On a relatively quiet week of economic data, financial markets are still positioning for a December Fed rate hike, US tax reform as the implications of a new chair of the Federal Reserve’s FOMC start to set in. We look at the outlook for forex, equities and commodities markets.


Tax reform was never going to be easy. Traders gave a muted reaction to the announcement of the Republican’s tax reform bill, which the House GOP estimates to add c. $1.5 trillion to the deficit in the next ten years. Not so much as tax reform, as a massive tax cut then. The question is whether it is worth the additional lump on the deficit (and all the debt interest that comes with it) for the additional growth the tax cuts generate. The Tax Policy Center estimates that after 40 years, GDP would be -0.4% lower due to increased debt payments. The reform is a mixed batch of tax changes, removing several loopholes to effectively pay for income tax cuts across the spectrum could be considered positive. However, there is also cuts to corporation tax from 35% to 20%, and the rate for “pass through” business to 25%. Along with removing estate tax, these are considered to be benefitting the richest in society, whilst fiscally abandoning “border adjustment” means these are not even countered and drive up the debt burden. The Republican leaders need to convince that the middle-income Americans can benefit from the reforms too. However adding a huge slug to the deficit without the long term benefits to the economy will be a tough battle to win. With a sceptical Senate GOP this looks to be a struggle for a 2017 legislation win for Trump. If so, this may put a hold on increased inflation expectations, and is why Treasury yields failed to pick up on the announcement.


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.