Trump’s proposed tax reforms and tax reductions

Trump’s big tax reforms and tax reductions on Wednesday proved to be not so big, at least from Wall Street’s perspective. US equities shrugged off earlier gains after flirting with all-time highs, the dollar pared back some gains, and Treasury yields declined slightly from a two-week high.

The market’s reaction to the core principles of President Trump’s tax plan, which included a cut to corporate tax from 35% to 15%, isn’t based on the “buy the rumors, sell the news” phenomenon, but it reflects investors’ skepticism that the proposed cuts will be very difficult to pass through Congress.

The lack of details contained on Trump’s single piece of paper was perceived as a publicity stunt for the President as he celebrates his first one hundred days in the Oval Office, and unfortunately, seemed more of a wish list than a serious starting point.

Many economists agree that it’s almost impossible for the proposed plan to be revenue-neutral, and that’s why Democrat and Republican deficit hawks will stand against it. Although I think we will see some sort of tax cuts and reforms, it’s not likely to occur by August this year, and of course won’t be of the proposed magnitude, which is likely to be a negative factor to the US $ and equities.

The market’s focus will shift to the European Central Bank’s monetary policy meeting later today. While no changes to asset purchases or interest rates are expected, Mario Draghi’s tone will guide the Euro. During the month of April, economic data has shown a fair improvement in the Eurozone. Unemployment declined to an eight-year low, PMI posted its strongest readings in six years, consumer confidence strengthened, and construction of buildings and infrastructure rose at its fastest pace in almost five years. On the downside, inflation levels slipped to 1.5% in March.

The Euro will trade based on whether Mario Draghi looks at the glass half full or half empty. However, I find it difficult not to acknowledge the improvement in economic developments, and that’s why I see further potential for the single currency to move higher.

Hussein Sayed, Chief Market Strategist, FXTM

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