USD Bounces From Month Low

24 May, 2017

The Trump administration has presented its 2018 budget plan to Congress last evening. The budget plan calls to slash $3.6 trillion in government spending over the next decade, mainly reducing the funding for healthcare and social benefits (such as Medicaid, SNAP, pensions for government staff) and Environmental Protection Agency funds.

The cuts are to be used for funding to boost economic growth and to reduce the US deficit. Nevertheless, it will result in numerous needy American citizens losing vital benefits.

The plan forecasts economic growth will be increased to 3% after passing the budget cuts, tax reform, regulation reform and infrastructure plans. However, following the performance of Trump’s administration since taking office, it seems difficult for any of Trump’s plans to be passed smoothly.

Markets forecast US economic growth is ranging between 1.9% – 2.2%, a 3% target seems to be a big challenge to achieve. The scale of the budget cut is substantial with a distinct possibility that Congress will reject the plan in its entirety or pass only portions of it.

The dollar index has fallen approximately 2.67% since May 12th, hitting its lowest level of 96.68, post the US presidential election, on May 22. On Tuesday May 23rd, following the announcement of the budget cuts, the dollar index moved higher breaking the resistance level at 97.00 and touching a 3-day high of 97.35 early on Wednesday morning.

On Tuesday, EUR/USD retreated from a 6-and-a-half-month high of 1.1267, breaking the psychological level at 1.1200 as corrective pressures intensified with consolidation around 1.1180 on Wednesday trading. USD/JPY rebounded around 0.68% from the support at 111.00, hitting a 1-week high of 112.04 on Wednesday morning. USD/JPY is currently consolidating below the psychological resistance level at 112.00.

FOMC May Meeting Minutes will be released at 19:00 BST this evening. Per the CME FedWatch tool, the probability for a rate hike in June rose to 83.1% after the release of the 2018 budget plan. That said, markets are assuming the Fed will stick to its rate hike pace regardless of Trump’s Russia leak scandal and soft economic data. Keep an eye on the Minutes, we will likely get further clues about a June rate hike and updated economic outlook. Be aware that it will likely cause volatility for USD and USD crosses.

Moody’s has downgraded China’s sovereign credit rating from Aa3 to A1 due to fears over rising debt levels. The new rating is same as the ratings of Czech Republic, Estonia, Israel, Japan and Saudi Arabia. The adjustment has weighed on Chinese yuan and the Chinese stock markets.

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