FX.co ★ Euro has difficulty with ideas for continuing growth

Eurozone

The euro is stable after the news that the US Senate approved the tax reform on Wednesday. The market regarded this news as positive and bond yields rose to annual peaks. It is expected that the demand for developing countries' currencies will increase while the demand for protective assets will decrease.

One of the main tasks of the reform is the repatriation of the American capital. In foreign accounts, it is estimated that there are up to $ 2 trillion with most of them in Europe. Since the corporate tax rate has been reduced from 35% to 21% and for incomes received abroad it will be even lower, the result could have a significant impact on the euro due to the reorientation of financial flows.

At the same time, their own macroeconomic indicators indicate some saturation of growth. The Ifo index for Germany fell slightly in December and there is currently no driver for continuing growth.

Today, the European Commission will publish its view on the dynamics of consumer confidence and on Friday the Gfk will release their report. If their results are similar to the data from Ifo, the euro will begin to experience additional pressure and sales may intensify.

A quarterly payroll report showed that growth in the third quarter was only 1.6% with a forecast of 2.0%. This means that instead of the expected growth, it showed a decline. This factor will put pressure on inflation and expectations will be lowered. In the end, this will give the ECB the right to delay the beginning of the process of normalizing monetary policy.

In general, the expectations for the euro area and the US are beginning to change in favor of the latter. Of course, tax cuts will lead to an increase in the budget deficit and related unpleasant consequences but in general, the capital will approve of the prospects that, amid a lower balance, the Fed could cause an increased demand for the dollar. It is likely that the EURUSD pair will decline by the end of the week to 1.1780 with the subsequent acceleration of the decrease as new information on the beginning of the implementation of the tax plan in the US is received.

United Kingdom

The consumer confidence index from Gfk declined to -13p in December. The overall decline for the year was 8p which is a worrying sign. Consumers are less inclined to spend and save more and more because they are not sure about the financial perspective. The overall economic situation is extremely negative. By December, this subindex has fallen to -31p.

Estimates of consumer confidence in the United Kingdom and the United States are moving in different directions, with the speed of divergence increasing. This factor is important for assessing the prospects for the dollar and pound, as in both countries the economy is mainly in the service sector. In the US, especially after the adoption of the tax plan, GDP growth rates may increase while the United Kingdom is facing a threat of a slowdown.

The pound has strengthened somewhat in recent months as the probability of a soft Brexit was quite high. This means that Britain could retain some of the privileges in relations with the EU. The latest news indicates that this probability is decreasing and the output will be more stringent. The pound, thus, risks being subjected to additional pressure, which makes its chances against the dollar even weaker.

The pound may fall as a result of the week to 1.33 with the prospect of moving to the support level of 1.30. This can only be prevented by negative news from the US, which casts doubt on the FRS's plan on rates in 2018.

Oil

Oil quotes again rushed upwards. The reason was the positive data from the US Energy Ministry, published yesterday. There was a reduction in crude oil reserves along with an insignificant increase in gasoline stocks, indicating some potential for growth in demand.

Also, the upward pressure on oil is provided by the adoption of a new tax plan, which may eventually lead to an increase in business activity. As a reaction to the reforms in the United States, the currencies of developing countries and commodity currencies are growing. In fact, the process develops in favor of the bulls if we add here the long-term factor of constraining demand from OPEC +. Most likely, the oil will be able to update to a maximum of 65.30 in the coming days.л.