Soft tax reform may leave markets unimpressed

FX:EURUSD   Euro / U.S. Dollar
British pound

British pound jumped by almost a percentage point against the buck and showed less confident superiority over the European currency amid progress on the "divorce deal" with European Union. UK is on the verge of settling disputes with the EU, where the amount of "forfeit" will be 44-55 billion euros. After that, both sides will be able to start discussing the conditions for Britain's access to the single EU trading market, which accounts for about 45% of the country's exports. Among other insurmountable differences is the definition of the borders between Ireland and Britain after the last exit from the customs union in 2019, as well as the legal status and rights of EU citizens remaining in the country.

EURGBP fell sharply from 0.90 to 0.8850 during the trading session on Tuesday and will likely storm a three-week low of 0.8800. GBPUSD easily got through 1.34 mark, however, before the results of voting on the tax reform in the US, where the dollar has a chance of a sharp strengthening against opponents, it may be too late to go long on the pair. Considering calls on GBPUSD will be possible after the US fiscal issue is resolved.

Tax Reform in the US

In the issue of fiscal reform in US, the largest since Reagan's time, another important shift has occurred. Republicans in the budget committee of the US Senate, as expected, approved the reform plan, promoting it to the voting stage, which will be held on Thursday. In the Senate Republicans have a small advantage of just four votes and considering opposition from Democrats, it will be quite difficult to pass the bill. In case of positive voting results, the Lower and Upper Chamber will have to come to a single version of the document before the president's signature appears on it.

Last week, investors took a bearish position on the US currency, this is evident from the dollar's losses since early November from 95.00 to 92.50 last week. This week, the currency is going through a pullback, but it will be difficult to develop a bullish impulse, since the "modest" version of the reform is already priced in the dollar, and with a minimal majority of Republicans it is unlikely to persuade the Senate to "reckless» spending, i.e. a "strong" reform version. Nevertheless, the correctional movement will probably take the dollar all week.

The desire of the Fed Chairman Jeremy Powell to continue deregulation in the financial sphere also tends to favor long-term dollar shorts, as such a move will fuel the demand for yield and decreasing holdings of the currency. Also, the weak dollar remains part of Trump's policy, and the decline in the dollar is only a matter of time. In intraday dynamics of EURUSD , the main component of the dollar index is to focus on data on inflation in the eurozone, GDP and inflationary Core PCE in the US. Its unlikely to see surprise on the inflation front of the United States but Europe can really surprise.

The oil market

In the oil market, investors record profits after recent price gains on various bullish expectations. Dynamics hints that positioning again is subject to the rule "buy on the rumor, sell on the facts." Brent lost about 1 percent, WTI fell by half a percent to a level of 57.50. The API data disappointed indicating the growth in activity of shale in the US, EIA data is likely to confirm this today. Participants in the OPEC deal will probably not outperform themselves and accept the expected agreement to extend quotas, which will provoke a sell-off. Short-term goal Brent - $ 60 per barrel, after which it will be possible to consider further growth.

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