Summary:

  • The US Congress will vote on the final version of the Tax Plan
  • The Plan could support the US economy with a fiscal boost
  • EURUSD is clinched in a consolidation but we spot a H&S formation
  • US500 keeps storming higher, nears 2700 points

The final week before Christmas could be decisive for some crucial financial markets like Wall Street equities and the US dollar. It’s been more than a year since Donald Trump was elected to become the president and it’s high time for him and fellow Republicans to deliver on their promises. In this analysis we provide an overview of the Tax Plan votes and take a look on EURUSD and US500.

What is the Plan about?

The Tax Plan is advertised by the Republicans as the much needed comprehensive overhaul of the tax US Tax Code. Indeed changes are very broad. Most importantly they include corporate rate cut from 35 to 21% and provide some temporary cuts for individuals. While the Plan is clearly beneficial for the business as the tax rate is reduced and small business can use significant deductions, an impact on individuals is less clear. Independent tax analysts point out that it benefits the rich with a lower top rate and higher allowance for estate taxes.  

Why is it important for the markets?

A lower tax rate means a higher portion of earnings for shareholders which could justify higher price to earnings ratios. Importantly the bill will add an estimated $1.5 trillion to deficit over a 10-year horizon making it a relatively strong fiscal stimulus. It will open more space for higher interest rates – an important indication for the US dollar.

When is the Plan about to be voted?

The current version of the legislation needs separate votes in the House and Senate. The Senate vote is the key one as Republicans hold only a thin majority of 2 votes in that chamber. There is no strict date or time for the vote but it is expected to take place on later than Wednesday. It is believed to have a meaningful impact on both the US equity markets and the US dollar.

EURUSD technical analysis

EURUSD has been stuck in a consolidation for months and it could certainly use a strong impulse. We may see that a resistance level just above 1.19 has been too tough for bulls to break, at least for now. After a large head and shoulders formation from the third quarter resulted in just a partial materialization we can see  smaller replica of it now with a shoulders line at 1.1855 (the nearest resistance) and a neckline at 1.1720 (the nearest support). A mid-term support is at 1.1550.

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We can spot a head and shoulders formation on the EURUSD. Source: xStation5 

Do notice that a relative resilience of the euro has not been backed by the bond market. In fact when we analyse a 10-year spread between Treasuries and the Bund (which worked pretty well with EURUSD for many months) the gap has been growing steadily and could create downside risks for this market.

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Floor removed? EURUSD has remained stable despite a deterioration in the yield spread. Source: Bloomberg, XTB Research 

US500 technical analysis

A rally on Wall Street has been relentless since Donald Trump has been elected. We may see that a recent impulse was able to push US500 above an upper limit in the channel and has already equalled a similar move from February. Back then it ended with a small profit taking but for as long as a scale of it remains small (below 100 pts.) it would not alter the trend. Another support worth watching is an upper limit of the channel which is where the bulls could regroup. Only a retreat above 100 points could put this trend in peril as it would create an overbalance.  

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US500 rally has been relentless and the are no signs of trend reversal at this stage. Source: xStation5