Markets Await Trump’s State of the Union Speech

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USD Soft Ahead of Key Trump Speech

Last week saw the US Dollar coming under selling pressure on the back of comments by Treasury Secretary Mnuchin who highlighted his willingness to pass tax reforms ahead of the August recess, though did note that he recognised the risk of delay. Mnuchin also played down the potential impact of Trump’s policies on 2017 growth.

Trump’s speech before Congress today will be closely watched by market participants though it isn’t clear just how much detail on his key policy agenda will be shared during the speech. Last week, Trump noted that the details of the tax reform would only be made public after the health care plans are released in mid-to-early March.  Furthermore, some key policy makers such as Commerce Secretary Wilbur Ross, have not been confirmed yet, which is likely to have a delaying effect on policy action planning.

Trump Gives Clues As To Speech Content

While the exact content of the speech is not known, Trump and others in the administration have given some hints as to what will be contained in the speech which is expected to include a laying out of Trump’s plans to replace the Affordable Care Act. The Trump administration have also indicated that the President will propose a significant increase in defense spending for the fiscal year starting in October. Officials also noted that this increase will be offset by cuts elsewhere in the Federal budget. Disappointingly, it seems that at this stage the speech will not include any details on the administration’s economic policy agenda as these specific policy proposals are still being developed.

Fed Speakers on Watch This Week

There are factors this week which could potentially lend support to the US Dollar. Fed Chair Yellen speaks on Friday and will deliver the last speech by an FOMC member before the blackout period begins ahead of the March FOMC. While Yellen is likely to highlight the risks of waiting too long before raising, current market pricing isn’t expecting a March hike, so it will be interesting to see how this pricing will change in response to the speech. Vice Fed chair Fischer will also speak this week, discussing the framework for monetary policy, though is likely to focus on the communication of policy instead of the outlook for its direction in the short term.

On Monday, Fed’s Kaplan reiterated vis view that rates should be raised sooner rather than later and said that even if the Fed raised rates “a few times” over 2017 that it would have a stimulating effect on the economy which he feels is likely to rise grow more than 2% this year. Other Fed speakers this week include Bullard (Tuesday), Mester (Thursday) as well as Evans and Lacker (Friday).

Key Data to Keep an Eye On

As well as speeches by various Fed members, we also have a raft of key US data this week which kicked off yesterday with Durable Goods. In January, the reading came in at 1.8% vs. the expected 1.7% marking an end to two months of declines. Many are expecting business investment to strengthen this year as fuelled by a recovery in the manufacturing sector after two months of subdued gains.

On Tuesday, we have the second estimate of Q4 GDP which is expected to print 1.9% with risks skewed to the upside. On Wednesday, we have personal income and consumption data followed by ISM manufacturing which is forecast to remain unchanged at 56. Finally, on Friday, we have the ISM Non-Manufacturing index which is again expected to remain unchanged at 56.5.

Technical Perspective

After breaking out strongly in November, The US Dollar Index has subsequently retraced lower to retest the broken 2015 high around 100.30 where it continues to battle for direction. The next key support below the level will be the rising trend line from last year’s lows.

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