Tickmill

The Democrats seems to be losing the grip

Long
FX:EURUSD   Euro / U.S. Dollar
Trump tax reform

Predicting the failure of the Trump tax reform because of its scale and unclear double-side backwash, skeptics apparently understated the president's negotiation skills.

Despite initial skepticism, the number of supporters of the tax cuts is growing rapidly among Republicans. On Monday, it was clear that the level of approval allows for rolling out of a budget scheme as early as in October, opening the way for reform through Congress without Democrats’ support. If the budget estimate is not adopted, the bill can be approved only if there are at least 60 votes in the Senate, where the Republicans hold 52-48 majority.

Fiscal stimulus, which costs are estimated at 6 trillion dollars in 5 years, is aimed at boosting consumption and investment activity. According to Keynesian ideas, in conditions of excess monetary supply (and hence, low sensitivity of investments to interest rates), fiscal stimulus of the economy works most efficiently. If tax cuts sufficiently "cover" the poor layers of the population, whose propensity to consume is higher, then we can speak about a very noticeable stimulating effect on consumer demand. Speaking about investments, the higher the rationality of the agent's expectations, the lower the effectiveness of state intervention in the economy. Firms and the financial market are agents with fairly rational expectations, so the effect of fiscal shock on the investment component is very controversial.

The relationship at which the markets are now trying to speculate on is the accelerated pace of rate normalization in case of successful tax reform. Progress in this direction means a bullish signal for the dollar in the medium term.

Positive feedback from the Republicans on Monday caused a sharp collapse of gold to $1,290. As a non-interest asset, the cost of its possession is expressed in the cost of borrowing of the US currency, so its price reflects the expectation of markets for future rate increases.

Another candidate for the head of the Fed was John Taylor known for his "Taylor rule" in increasing the money supply. Trump held an interview with him, however, who will take the place of Yellen is not yet clear. His appointment to the post promises much higher interest rates in the future than the long-term target of 2.75% assumed by the current management.

EU data

The ECB's divergence from the Fed in reducing money supply again became the subject of speculation after release of economic sentiment and inflation in the euro area. In September, the price increase remained at the same level of 1.5%, the core indicator increased to 1.3% from 1.1%. Nevertheless, the ZEW survey in Germany indicated a decrease in confidence in the future for firms, the key figure did not meet expectations (17.6 with a forecast of 20 points). The EURUSD fell by 0.25%.

Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice.

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