Last week, the US Senate approved the budget plan that gives way for tax cuts. Notably, the US Republican Senator Rand Paul gave his support for the proposed tax reform bill. The dollar index (DXY), which tracks the US dollar against a basket of G10 currencies, recorded its biggest monthly gain of 0.49% last Friday. The Greenback has turned bullish because the market expects the Trump’s tax reforms to push up growth and inflation.
Further, the market is also anticipating a Fed hike in December. That can be understood from the 2-year Treasury note yield, which has increased to 1.55%, from 1.26% on September 7.
The odds of a December rate hike are now at 80%, according to the Fed Funds Futures data. That would add to the strength of the Greenback.
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In Europe, the President of Catalan Carles Puigdemont refused to drop the independence claim last week. Following that, Spanish Prime Minister Mariano Rajoy invoked ‘article 155‘ of the constitution and imposed direct rule on Catalonia. The region was also stripped of its autonomy. The escalating political tensions would discourage investments in the Euro region.
The ECB is expected to meet on Thursday, and issue its policy statement. Analysts expect the monthly asset purchases to be reduced to €30 billion in 2018. Traders and investors fear that such a dovish tapering would postpone rate hikes in the Euro zone to 2019. Currently, the ECB is purchasing €60 billion worth assets every month to indirectly propel the economic growth in the Euro zone. Thus, economic developments favor a decline of the EUR/USD pair at this point in time.
The stock is facing resistance at 1.1860. Further, the EUR/USD pair is also moving below the 200-period moving average. The weakness in the counter is also indicated by the declining momentum indicator. Thus, we can expect the EUR/USD pair to reach the next support level at 1.1520.
EUR/USD Pair: October 26th 2017
In the forex market, we may go short near 1.1820, with a stop loss order above 1.1880. If the pair declines as anticipated, then the profit will be booked near 1.1560. Further, we may also invest in a put option as long as the contract is valid for one week. We prefer to establish the trade when the exchange rate of the EUR/USD pair is about 1.1820.
