USD: A Swift Taylor Shake Off? - ING

The nomination of Jerome Powell as Fed Chair is unlikely to cause any major fallout in the USD today – with ING estimates at best saying that the dollar could fall by 0.50-0.75% over the next few weeks as some of the more hawkish Fed policy bets get priced out of markets, according to Viraj Patel, Foreign Exchange Strategist at ING.

Key Quotes

“But the bigger driver over the past few weeks has been a positive reassessment of US economic fundamentals – with the tax reform story partly playing a role here. The House GOP tax bill will be widely scrutinised today – and investors may wait for more official estimates from the JCT (Joint Committee on Taxation) and CBO (Congressional Budget Office) – before assessing the whether the bill stands a chance of passing through Congress.”

“Tax reforms boosting the dollar (or causing bond yields to breakout higher) is not our central assumption for two reasons:

1. There isn't enough political buy-in. The budget bill to start tax reform discussions got narrowly voted through in both the Senate and House – and that's before we have all the key details. It's not the fiscal hawks that we're concerned about – remember that part of this Budget Resolution includes the ability to add $1.5 trillion to the deficit over 10 years. But it's the GOP conservatives that may take stock with the potentially regressive nature of these tax cuts. The same logic can be applied to any hopes of a bipartisan tax deal.

2. There is little to suggest that the proposed tax package will provide anything but a short-term boost to an economy already operating at full potential. Without genuine supply-side or reform policies, the fact is that you're adding to the fiscal deficit without changing the long-run trend growth in the US economy – and that is textbook dollar negative (despite the prospect of higher US interest rates).”