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EUR/USD Holds Support At 1.1815-1.183, Goes For Counter-Attack

EUR/USD Holds Support At 1.1815-1.183, Goes For Counter-Attack

Haste makes waste. Looking at the Republicans, who are hurrying to pass the draft tax reform bill through the Congress and submit the final variant to the president before Christmas, one starts to suspect, that something is wrong. According to the last Reuters poll, only 29% of Americans support the most radical fiscal reform since the 1980s, when the amount of the discontented has grown from 41% to 49%. The result again arouses the question: how could such a party come to power?

The Republicans’ haste can be understood. They don’t want to be criticized so much, that the reform won’t be adopted. However, under an enormous time pressure, there is going to be a split within the party: some of its representatives think, that the corporate tax should be reduced not to 20% but to 21-22%, as every percent equals to $1000 billion during 10 years.

The matter is, that the fiscal incentive start will obviously overheat the economy, which is already has exceeded the highest sustainable production level, calculated by U.S. Congressional Budget Office, for the first time since 2007.

Dynamics of U.S. actual GDP and potential GDP

Source: Wall Street Journal.

According to BNP Paribas, the reform can add 0.5% to GDP and make the Fed aggressively raise the interest rates. As a result, it will be much harder for Jerome Powell, than for Janet Yellen, who already now has to explain herself and prove, that the Fed doesn’t want to slow down the economic growth.

Should one, in this context, invest in the States, in particular, in its stock market, which already now looks to be overheated? May be it’s better to turn to Europe, which is only beginning the economy restoration cycle, the ECB monetary policy will remain ultra-soft for a long time and political risks are disappearing?

Political and geopolitical risks in Eurozone

Source: Financial Times.

This makes clear, why the speculative euro net longs lack only 3.3% to reach their three-year highs.

Deviation of speculative positions from the extremes

Source: Financial Times.

Eurozone looks more attractive than the USA, due to its fastest economic confidence growth since 2000, German inflation increase from 1.5% up to 1.8%, eurosceptics’ defense and lagging economic cycle. Is that a reason to hope, that EUR/USD yearly highs will be renewed already this year? If to count only on The Old World, it’s unlikely. Another matter, if Washington continues to confuse investors with the issues around the tax reform and the national ceiling debt.

Meanwhile, it needs to be stated, that euro bulls managed to hold the positions close to $1.1815-1.183 and went for a counter-attack, expecting strong statistics on European inflation. It’s unlikely to raise EUR/USD quotes above 1.195-1.196, another matter is the failure of the draft tax reform bill in the Senate.

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