US dollar slips as US politics back to the forefront

May 23, 9:33 am
US Dollar Index_USD

If keeping a track on the Federal Reserve policymakers was not enough, traders are slowly getting accustomed to keeping a close watch on the US politics and developments from the White House.

Last week, traders were caught off-guard after the US dollar posted one of the strongest declines on the back of a rather quiet trading week from the US, which put the focus on Washington.

Traders had already gotten used to erratic dollar movements in the early part of the Trump administration, considering that president Trump was trigger-happy when it came to expressing his personal views on Twitter; whether it had to do with Trump’s opinion on the US dollar or trade issues or for that matter, calling out Germany as a currency manipulator.

Politics from the White House dominates market sentiment

The US dollar posted one of the strongest declines as the world’s reserve currency was testing the levels last seen in November 2016. In just four consecutive days, the US dollar index futures fell from 99.50 to a six-month low at 97.41 last week, losing about 2.3% since 12th May.

The strong decline in the US dollar index, however, had a rather mixed response with other currencies. The euro rose to a 6-month high while price action was muted in the British pound. The USDJPY slipped to a 15-day low at 110.785 last week, while gold prices touched $1259 as a result of the weakness in the US dollar.

The reason for the sell-off in the greenback came about unsurprisingly on the political developments from Washington, amid a lack of any clear cues from the economic indicators.

Sentiment in the market started to dip after reports emerged that President Trump had fired the FBI director James Comey was investigating into the former national security adviser, Michael Flynn and his ties to Russia.

The political developments and the controversies aren’t something new to the Trump administration. Sentiment also soared partly due to the fact that since President Trump took office, the US administration was plagued by controversies than actual policy implementation.

Trump: Tax plans and fiscal stimulus, a “work in progress”

Nearly five months into the new US administration, investors are still clueless about the promised tax cuts, details of which were released in late April. Despite calling it the “biggest tax cut” in US history, critics quickly brushed aside the Trump tax plan noting that it only favored the rich.

According to the proposed plans, the US individual tax brackets would be cut from seven to three at 10%, 25%, and 35% while cutting corporation tax from 35% to 15%.

The tax plans also quickly shifted the narrative as Trump’s refusal to disclose his tax statements overshadowed the tax proposals, with some Republican members also asking for Trump to release his tax returns.

Traders are also slowly giving up hope on the proposed on the fiscal stimulus plan which was in part responsible for the Trump rally that began following Trump’s election victory.

Fed minutes and GDP revision could shift focus back to rate hikes

While the economic indicators took a backseat last week, the week ahead might revive hopes of interest rate hikes. Investors will get a glimpse into the FOMC meeting that was held just a few weeks ago in early May.

Atlanta Fed GDPNow Model: Q2 U.S. GDP: 4.1% (May 16, 2017)
Atlanta Fed GDPNow Model: Q2 U.S. GDP: 4.1% (May 16, 2017)

The Fed retained its hawkish language and reiterated its stance that another rate hike was possible, perhaps as early as June, and dismissed the first quarter growth as a temporary blip. Indeed, the AtlantaFed’s GDP now the model is certainly showing that the US economy might have gained momentum in the second quarter.

However, without getting ahead, the key factors for the US dollar this week will include the FOMC meeting minutes which will be released on Wednesday, May 24th and the second estimates for the GDP (Q1, 2017) due on Friday, May 26th.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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