US & UK Rate Hikes Likely, Trump Unveils His Tax Reform

The US economy’s strength was underlined on Thursday with the release of US Durable Goods Orders for August that beat all estimates coming in at 1.7%. Markets had been expecting an improvement from the previous release of -6.8% to 1%. The strong release also negated the effects of the recent Hurricanes, which were expected to drag on Q2 growth. In addition, Core capital goods orders surged 3.3% year-on-year. With signs of increased business spending, the likelihood of a December rate hike looks ever more certain. The latest CME FedWatch tool rose to 83% from 72% on Monday on the likelihood of a December hike in rates.

The Trump Administration and Republicans unveiled their Tax Reform Plan to Congress. Changes in personal taxation and, more importantly, a huge reduction in corporation tax from 35% to 20% will help speed along US economic growth through capital & consumer spending. A repatriation of overseas assets is also part of the reform. This would allow US companies that hold in excess of $2.5 Trillion in profits overseas to repatriate this money back to the US at a significantly reduced tax rate – and not the current 35% corporate tax on earnings. Bear in mind, this is a “blueprint” that appears to leave out many details and will require a large amount of new legislation if, indeed, it gets passed. Trump is desperate for a “win”, as all of his previous plans have failed to be enacted, although many believe enacting this plan will face many hurdles.

The Bank of England’s Chief Economist, Andy Holdane, commented on Wednesday that he saw encouraging signs of pay growth in the UK and that any increase in UK interest rates should be seen as a “good news story” for Britain’s economy. He also stated, “In the September minutes, in particular, a majority of the committee – of which I am one – said we could be nearing the point where a reduction in some degree of monetary stimulus might be warranted in the coming months”. The markets believe a hike in UK rates could come after the Bank of England November 2nd meeting, with suggestions of a 0.25% hike to 0.5%.

EURUSD remains weak but is holding above 1.1700 to currently trade around 1.1751.

USDJPY improve 0.2% in early Thursday trading to currently trading around 113.00.

GBPUSD is little changed overnight, currently trading around 1.3397.

Gold continues to suffer from overall USD strength. Currently, Gold is down 0.2% in early Thursday trading at $1280.

WTI crude oil has declined 0.3% overnight to currently trade around $52.00pb.

Major economic data releases for today:

At 07:35 BST, Bank of Japan Governor Haruhiko Kuroda will hold a press conference about monetary policies in Tokyo.

At 09:15 BST, Bank of England Governor Carney speaks. The markets will be scrutinizing his speech for clues regarding future monetary policy. His comments have been known to initiate GBP volatility.

At 13:30 BST, the US Bureau of Economic Analysis, Department of Commerce will release Core Personal Consumption Expenditures (QoQ) (Q2). Consensus is suggesting an unchanged release of 0.9%. Any release that is substantially different will result in USD volatility.

At 14:30 BST, the US Bureau of Economic Analysis will release Gross Domestic Product Annualized (Q2). Consensus forecasts suggest an unchanged rate of 3%.

This article is written by FxPro

Harvey & Irma Effects Still Evident, December Rate Hike Chances Increased Post Yellen’s Speech

The effects of Hurricanes Harvey and Irma are still impacting US economic growth as evidenced by Tuesday’s Conference board data release. Confidence dropped from 120.4 in August to 119.8 in September, with confidence “decreased considerably” in the ravaged states of Texas and Florida. In a separate report, the US Commerce Department released data that showed new home sales had decreased 3.4% to a seasonally adjusted rate of 560K units last month – the lowest level since December of last year.

On Tuesday, a South Korean lawmaker said that “North Korea has boosted defenses on its east coast”. Apparently, North Korea has moved military aircraft to its east coast following their claims that the US had declared war on Pyongyang. This follows after US Air Force B-1B Lancers, powerful conventional bombers, flew past North Korea on Saturday amid claims from South Korea’s National Intelligence Agency claiming the Korean People’s Army was moving warplanes and coastal defense units into position in the eastern part of the country. However, Chairman of the Joint Chiefs of Staff General Dunford stated on Tuesday that despite the heated war of words between Pyongyang and Washington, the US has not noticed any significant posture shifts on the part of the North Korean military that would signal that a war is on the horizon. Needless to say, the continued tensions are a concern to the markets which will be quick to move to safe-havens if the tensions escalate.

The EUR suffered the second day of selling pressure, as the markets are growing concerned that the rise in right-wing nationalism witnessed in the recent German elections could spread to other Eurozone countries. Specifically, the focus has shifted towards both Spain and Italy and their political shift to a more right centric nationalist view, and how they could undermine the Eurozone community.

Fed Chair Janet Yellen warned in a speech on Tuesday that it would be “imprudent” to keep US monetary policy on-hold until inflation is back to 2%. She stated that the Federal Reserve “should also be wary of moving too gradually on rates”. Following her comments, the CME FedWatch tool indicated the possibility of a December rate hike has risen to 78% from last month’s 40%. With the market digesting this likelihood, USD gained across the board. Markets will be keen to see the Tax Reform outline that will be presented by Trump’s administration and Republicans in Congress today. A reduction in corporation tax will help bolster profits of US corporations, whilst a reduction in individual income tax will help consumer spending.

EURUSD remains close to 5-week lows, currently trading around 1.1757.

USDJPY remains firm in early Wednesday trading. Currently, USDJPY is trading around 112.69.

GBPUSD gave up 0.45% in early trading to currently trading around 1.3392.

Gold once again came under pressure as risk-on sentiment gathered pace. Currently, Gold is trading around $1,295.

WTI crude oil is currently trading near Wednesday highs at $52.05.

Major economic data releases for today:

At 13:30 BST, the US Census Bureau will release Durable Goods Orders & Durable Goods Orders ex-Transportation for August. Durable Goods Orders are expected to see a significant improvement in August of 1%, compared to the previous release of -6.8%. The release excluding Transportation is forecast to come in at 0.2%, slightly lower than the previous release of 0.6%.

At 16:45 BST, Bank of Canada Governor Stephen Poloz is scheduled to speak before the St. John’s Board of Trade in St. John’s, Newfoundland. The topic of his speech is The Meaning of “Data Dependence”: An Economic Progress Report. The speech will be followed by a Q&A session that may provide insight into any changes in Canadian Economic policy.

At 21:00 BST, the Reserve Bank of New Zealand will announce their rate Decision and their Rate Statement. The consensus is forecasting for New Zealand interest rates to remain at 1.75%. Any increase will cause volatility for NZD currency pairs. As always, the markets will be looking to see if there is any change in monetary policy as that will also create market volatility.

This article is written by FxPro

Risk-On or Risk-Off? North Korea, German Election and Central Banks Weigh on Markets

The rhetoric continues between North Korea and the United States with North Korea’s Foreign Minister, Ri Yong Ho, describing President Trump’s recent comments as “tantamount to a declaration of war” and even stating that Pyongyang reserved the right to take countermeasures that could include shooting down US bombers that are not inside Korea’s airspace. The White House was quick to deny such claims and Trump’s Security Advisor has commented that the US has 4 or 5 different scenarios as to a resolution, stating that “some are uglier than others”. Meanwhile, China’s Ambassador to the United Nations has stated that the situation is “getting too dangerous”. As the “war of words” continues the markets will be evaluating risk and will act accordingly.

ECB President Mario Draghi addressed the European Parliament’s committee on economic affairs on Monday and commented that “Overall, we are becoming more confident that inflation will eventually head to levels in line with our inflation aim, but we also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialize”. The speech held no surprises as it remained consistent with the ECB’s Policy Statement it made in September. EUR did suffer, falling 1% on Monday and another 0.3% on Tuesday morning over fears of the German right wing political party’s recent impressive showing in the German elections and the fact that Chancellor Merkel will need time to form a new coalition government.

In the United States, New York Fed President William Dudley commented to students and professors at a Community College in NY State that “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the (Fed‘s) 2% objective over the medium term”. He also added, “In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually”. Dudley’s comment mirrored the comments he made earlier in September and reinforced the expectation of a rate hike in December.

EURUSD, after dropping 1% on Monday to a 4-week low of 1.1831, continues to trade lower on Tuesday and currently trade around 1.1812.

USDJPY dropped over 0.3% on Monday and appears to remain under pressure in early Tuesday trading. Currently, USDJPY is trading around 111.69.

GBPUSD has improved 0.1% overnight to currently trade around 1.3478.

Gold gained over 1% on Monday, as risk-off sentiment gathered pace with the latest “exchange” of words between the US and North Korea. Currently, Gold is trading around $1,310.

WTI crude oil saw its most dramatic one-day gain for several months, as it improved by over 3% on Tuesday. With Turkey threatening to cut crude oil flows from Iraq’s Kurdistan region to the outside world, London Brent hit a 26-month high of $58.40 overnight. Currently, Brent is trading around $58.40 with WTI trading around $59.20 in early Tuesday trading.

Major economic data releases for today:

At 13:00 BST, Chairing of Jean Monnet Lecture “Good Pension Design” by ECB Praet at the Second ECB Annual Research Conference organized by the ECB in Frankfurt, Germany.

At 14:30 BST, FOMC Member, and President and CEO of the Federal Reserve Bank of Cleveland, Loretta Mester is scheduled to speak in Ohio, USA.

At 15:00 BST, the US Census Bureau will release New Home Sales and New Home Sales Change (MoM) for August. The forecast is for a slight increase in New Home Sales to 0.585M (prev. 0.571M) and New Home Sales Change to come in at 3.3% (prev. -9.4%)

At 15:30 BST, FOMC Member Lael Brainard is speaking in Washington D.C. at the Federal Reserve Board Conference: Disparities in the Labor Market: What are we missing?

At 17:45 BST, Fed Chair Janet Yellen is scheduled to speak at the 59th NABE Annual Meeting in Cleveland, Ohio on Inflation, Uncertainty, and Monetary Policy.

This article is written by FxPro

German & New Zealand Elections, Japan next?

The results of the German Election have re-elected Chancellor Angela Merkel for a fourth term. Her CDU party won fewer votes than was expected and Chancellor Merkel commented that “the CDU would have hoped for better result, but we mustn’t forget – looking back at an extraordinary challenge – that we nevertheless achieved our strategic objectives: we are the strongest party. We have the mandate to form the new government and we will form the new government.” Chancellor Merkel will now be tasked with forming a coalition Government which is likely to take several months. Per the latest results, the CDU won 32.5% of the vote compared to the 2013 election that saw them win 41.5%. The normally strong SPD’s 20% of the vote is a post-war low for the party, whilst the right-wing nationalist AfD party, appears to have won 13.5% of the vote, making it the country’s third largest party. With the AfD securing third place this may cause concerns, as it may disrupt Merkel’s plans for further Eurozone integration.

In New Zealand, Prime Minister English’s National Party won the most votes in their General Election, although it was not sufficient to ensure a majority. The uncertainty of when a majority coalition will be formed has weighed on the Kiwi.

In Japan, Prime Minister Abe is expected to announce that the country will hold a snap election in October.

GBP was sold against USD and its major counterparts on Friday on news that the credit rating agency, Moody’s, announced it had downgraded the United Kingdom’ long-term issuer rating to AA2 from AA1 and changed the outlook to stable from negative. GBP had suffered earlier in the day as Prime Minister Theresa May had failed to give any substantive details on how the United Kingdom might retain preferential access to the Eurozone’s single market. Prime Minister May’s speech in Italy gave little detail and provided no new information as to the direction of the discussions, and outcomes, between the UK and Europe.

North Korea’s Foreign Minister, Ri Yong-ho, addressed the United Nations on Sunday, providing more rhetoric on the war of words between the US and North Korea. He told those assembled that “it was all the more inevitable” that the regime’s rockets would “visit” the US mainland. Ri also added that it was Trump, not Kim, who was on a “suicide mission”. He likened Trump to “the sound of a dog barking” and commented that he felt sorry for Trump’s aides when asked about the Presidents “rocket man” nickname for Kim. There has been the inevitable flight to safe havens, with JPY and Gold improving against USD. The markets are keenly watching for the next “round” of rhetoric which could lead to more risk-off sentiment in the coming days.

EURUSD is 0.25% higher in the early trading session; currently trading around 1.1925.

USDJPY moved higher overnight to currently trading around 112.25.

GBPUSD suffered from a credit downgrade and lack of information from Prime Minister May on Brexit solutions on FridayGBPUSD traded as low as 1.3449 on Friday, before retracing higher over the weekend to currently trade around 1.3540.

Gold is down 0.35% in early Monday trading, currently trading around $1,294.

WTI crude oil traded in a relatively narrow range on Friday and is little changed overnight. Currently, WTI is trading around $50.60pb.

Major economic data releases for today:

At 09:00 BST, the CESifo Group will release German IFO-Business Climate sentiment index, Current Assessment & Expectations for September. The Institute surveys more than 7,000 enterprises on their assessment of the business situation and their short-term planning. A release above consensus will see EUR gain, with a lower than forecast release putting downward on pressure on EUR.

This article is written by FxPro