From the minutes of December FOMC meeting, it became clear that the tax reform left inflation front under the sign of question for the FED. Although it was noted that tax discounts would spur consumer spending, the regulator said that it will continue to follow gradual rate hiking path, while maintaining risks in the tradeoff between GDP and inflation balanced in the long run. Such a statement is clearly bearish for the Dollar and begs a question even in the feasibility of the announced three rate increases in 2018.
Jeremy Powell will find in his new post the economy with mysteriously low inflation, and in the absence of positive shifts, the rate is likely to stay untouched. An uptick in inflation as a consequence of the tax reform is not expected in the coming months, other factors affecting the price increases should be considered, in particular, rising Oil prices, growing demand for US exports, and capital expenditures. But why? Because the expectations for fiscal stimulus are already priced in the Dollar and the specific effects of the increase in money supply (as a result of tax cuts) will appear only when these taxes are assessed. In general, there is a lag between the adoption of the bill and its economic effect, so the FED will definitely not be in a hurry. Actually, therefore, the Dollar is so actively declining.
It is also worth noting very modest expectations of the regulator from fiscal boost. Among annoying language for Trump in the protocol, there was noted that tax relief for individuals will have “some” effect on consumer spending, and tax cuts for companies will provide only a “modest” impact on capital investments. Firms will direct “released” funds to mergers, as well as the concentration of control through shares buyback.
The data published on Thursday reinforced expectations that the global economic recovery is gaining momentum.
Chinese economy and oil market.
So, PMI services sector in China from Caixin surpassed expectations as well as composite activity index, which led to an upturn in the oil market. Oil prices are setting new local records thanks to hopes for global consumption, as well as protests in Iran, which, although unlikely, can lead to strikes and supply disruptions. Currently, Iran’s production is about 4 million barrels.
Pound is on the ascending channel
The British Pound is trying to break through the September high of 1.36, being impressed by the data on consumer credits, as well as PMI in the service sector. GBP/USD is on the upward channel and in the absence of unexpectedly negative news on Brexit will continue the movement upwards.