HomeContributorsFundamental AnalysisDollar Strengthens on Tax Reform Hopes While Sterling and Kiwi Face Pressure

Dollar Strengthens on Tax Reform Hopes While Sterling and Kiwi Face Pressure

The US dollar did well versus a number of currencies on Tuesday as it gained significantly versus the pound, the kiwi and the aussie. The euro closely mirrored the dollar’s gains as traders are waiting for the outcome of the ECB meeting on Thursday before moving the world’s most traded foreign exchange pair: euro/dollar.

The dollar was helped by optimism that tax reform in the United States was a feasible goal in the near-term for President Trump and Congress. An upbeat Markit PMI reading for the US economy also provided support for the greenback, although most participants pay more attention to the ISM surveys for a measure of business conditions in the country.

The US dollar was unable to make progress against the euro following the announcement of relatively positive PMI indices out of the Eurozone. The Services’ PMI was a little weak as it missed expectations, although the services index at 54.9 still pointed to healthy growth. The region’s manufacturing PMI surpassed expectations by coming in at a strong 58.6, showing that the region’s manufacturers and exporters were benefitting from strong growth elsewhere. The PMI numbers showed that the crisis in Catalonia did not yet dampen business sentiment in Europe and markets did not appear too worried about the implications of the tense standoff between the government in Madrid and regional leaders seeking independence. Euro/dollar traded in a narrow range for most of the day at 1.1750-60.

The pound was weak as pound/dollar dropped to 1.3155 from a high of 1.3220 near the end of the Asian session, while euro/pound also rallied above 89 pence to reach 0.8940. The pound had staged a rebound in previous sessions due to a more positive outlook for the Brexit talks but that rally seemed to be foundering. Dovish comments by the Deputy Governor of the Bank of England caused the sell-off in the pound, as he questioned whether interest rates would need to rise during the November meeting of the policy-setting committee. It looks like the decision to raise rates might not be such a ‘done deal’ as the market had priced in, despite relatively high inflation and a healthy labor market in the UK. Economic growth, in particular, is not looking so positive for Britain compared to other advanced economies.

Selling in the kiwi was relentless throughout the day between the end of the Asian session and the end of the European session on concern that New Zealand’s governing coalition that emerged from the recent elections could lead to low interest rates for longer as well as economic policies that could hinder the country’s economic potential. Kiwi/dollar found some support at the 69 cent level and was trading near that level at 0.6911. The kiwi might be looking oversold but traders appeared reluctant to try and catch a falling knife and most would probably wait for the policy uncertainty to lift before undertaking long positions.

Looking ahead, API crude oil stocks could have an impact on oil prices (WTI oil was at the healthy $52.25 per barrel mark), while New Zealand employment numbers and Australian inflation will be the main highlights of tomorrow’s Asian session.

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