Hawkish remarks by Fed Chair Yellen on Tuesday continued supporting the dollar against its major rivals during European trading as markets were more confident now that the Fed would deliver another rate hike in December. Investors were also cautious to hear whether the US tax overhaul plan announced later today would be Trump’s first major legislative achievement since his election, a day after his proposals to repeal Obamacare failed to pass yet again.
The dollar index breached again the 93 key level during the European session, last trading at 93.23, as the odds for a third-rate hike to be delivered in December rose to more than 80% today compared to approximately 40% a month ago after the Fed Chair, Janet Yellen, said in Cleveland on Tuesday that rates should rise gradually despite the weakness in inflation.
Investors were also optimistic about the US tax reforms expected to be announced by Trump’s administration and Republicans in Congress today at 1920GMT. After a multi-month process of preparing the tax outline, Republicans are said to propose for pass-through tax rates to drop to 25% from the current 39.6% and corporate tax rates to decrease from 35% to 20%. According to rumors though, details on how these tax cuts would be delivered without increasing the federal deficit would be limited.
Moreover, US durable goods orders for the month of August recovered after a sharp fall in the previous month, rising by 1.7% m/m, more than the forecast of 1.0%. The core equivalent measure came in as projected at 0.2%, below the 0.8% recorded in July (upwardly revised from 0.5%).
Regarding August’s US pending home sales, those declined steeply by 2.6% m/m, posting the biggest fall since February. Expectations were for the figures to decline by 0.5% after a 0.8% fall in July. On Thursday, readings on final US growth rates for the second quarter will be also released.
Since North Korea did not proceed with any provocative actions after Trump’s latest comments, demand for safe-haven assets eased further. Dollar/yen surged to a 2 ½-month high of 113.22, while dollar/swissie advanced to a near 4-month high of 0.9755. In other safe-haven assets, yields on US 2-year treasuries reached the highest level since October 2008 and gold dipped to a one-month low of $1,283.68 per ounce.
The euro bottomed to a near 6-week low of $1.1723 as political stability is put to question in Germany after Sunday’s federal elections and as the dollar continued strengthening. In other news, the ECB’s bank supervisor Danièle Nouy argued that Europe’s banking sector may likely need to shrink as it has grown significantly.
The pound retreated to a two-week low of $1.3394, while the key event this week for the pound will be the BOE Governor Mark Carney’s speech on Thursday.
In New Zealand, RBNZ policymakers are scheduled to gather later today to decide on interest rates, which are projected to remain steady at a record low of 1.75% until the end of the year. The kiwi was moving sideways during the session near a 3-week low of $0.7200 as political uncertainty is weighing on the currency, with the leader of the opposition party saying that coalition agreements will not be made until October 7.
The aussie extended its losses for the third day reaching a six-week low of $0.7835 on the back of a stronger dollar and decreasing metal prices.
In Canada, the BOC Governor Stephen Poloz will release a report on the country’s economic conditions and hold a news conference at 1545GMT. Traders will be eager to hear whether the BOC is willing to continue tightening its monetary policy after two consecutive rate hikes. Dollar/loonie was up by 0.29% on the day at 1.2380.
In energy markets, oil prices hit lower despite the EIA report showing that US crude oil inventories declined by 1.846mn barrels the past week while analysts anticipated oil inventories to increase by 3.422m barrels. Gasoline inventories, though, rose by 1.107m barrels instead of falling by 0.921m as expected. Gasoline production was also up by 0.062m barrels. On the day, WTI crude traded 0.4% lower at $51.64 per barrel, while Brent was 1.1% down at $57.80.