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The US dollar is expected to advance against the emerging market currencies over the coming weeks, according to a report from Scotiabank. The US Senate approved a Republican-backed 2018 budget on a 51-49 vote last Thursday night, marking a major step towards GOP tax cuts.
The budget’s passage will allow the GOP to use a procedural maneuver to pass tax legislation through the Senate with 50 or more votes (simple majority), removing the need for seeking support from Democratic senators. US President Donald Trump said Sunday that he was optimistic Congress would pass the tax plan that he could sign by the year-end.
Meanwhile, it opens the door to expanding the federal deficit by USD1.5 trillion over the next ten years. UST yield curves could bear steepen as the passage will likely boost the US economic growth while raising market concern over increasing federal deficit. It would then provide a boost to the USD. President Trump hinted Friday that his top two candidates to chair the Fed are Fed Governor Jerome Powell and Stanford economist John Taylor, although the door is left open to other contenders.
Market participants believe Powell is a soft-spoken centrist while considering Taylor as in the hawkish camp. In addition, the ECB will announce a decision on its bond purchase programme on Thursday. On October 18, it was reported that the ECB could cut how much it buys each month to as low as EUR20 billion from the current pace of EUR60 billion should the QE programme be extended until December 2018.
On October 12, Bloomberg reported that the ECB is likely to trim its monthly bond purchases to EUR 30bn from current EUR 60bn with an extension for nine months through the end of September 2018. Spain’s Prime Minister Mariano Rajoy asked lawmakers Saturday to grant him unprecedented power to remove the leaders of Catalonia and temporarily control the region from Madrid.
"In our view, a longer and slower taper by the ECB and deepening Catalonia crisis will weigh on the EUR’s strength at the moment," the report said.
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