The Trump administration unveiled an ambitious tax plan, proposing sweeping tax cuts for American individuals and corporations. The proposal seeks to simplify the US tax code, and nearly doubles the standard deduction to $12,000 for individuals and $24,000 for families.
The tax plan, which was drafted by a group of congressional Republicans and administration officials, brings the number of personal tax brackets from seven to three. The individual tax rates would be 12%, 25% and 35%, and the plan recommends a surcharge for the very wealthy. Although, at present it does not set the income levels at which the rates would apply, so it is unclear just how much of a tax cut would go to a typical family. Corporations would see their top tax rate cut from 35% to 20%. For a period of five years, companies could further reduce how much they pay by immediately writing off their investments.
New benefits would be given to firms in which the profits double as the owners’ personal income. They would pay at a 25% rate, down from 39.6%. This creates a possible loophole for rich investors, lawyers, doctors and others, but administration officials say they will design measures to prevent any abuses.
The market reaction to the tax reform proposal was overwhelmingly positive, with US and global stocks rising, although investors are already starting to question the lack of details, and likelihood that the tax reform will be passed through congress quickly and into law.
The US dollar index moved to a multi-month high, after hawkish comments from Federal Reserve chair Janet Yellen heightened expectations for an interest rate rise in December. Yellen continued to strike a hawkish tone on the US economy and the need for ‘gradual rate rises’, which helped to underpin the dollar, as financial market started to price in one more rate hike by the Fed this year.
The US dollar index broke above its key 200-week moving average, which further accelerated the demand for greenbacks. The USD gained ground against the Japanese Yen also, as the USDJPY pair moved to a 12-week trading high, hitting 113.25.
Commodity currencies also suffered against the US dollar, with the Canadian, New Zealand and Australian dollar all falling back against the greenback, although the Kiwi was generally on the back-foot on uncertainty created by the recent general election.
Gold prices fell to a 1-month low, dipping to $1278 per ounce, as US dollar demand soared and a lack of general buying interest in the yellow-metal above the $1,310 per ounce level. After breaking-through the $1,300 per ounce mark, the decline accelerated sharply, with the price of gold now falling over 6% from early September. Traders will watch the $1,2990 technical level this week for further clues as to spot gold’s medium-term direction.
The euro currency declined sharply last week, as uncertainty over the German elections spooked markets. The euro fell under the 132.00 mark against the Japanese Yen, while the EURUSD pair slipped back to a four-week trading low, hitting 1.1717. Politics in Europe is now starting to unsettle financial markets, as Angela Merkel’s looks to form a coalition government, after her CDU party failed to gain a majority victory.
The single currency is also facing further political risks in Spain, as the Catalonian people seek independence. Tensions are reaching crisis point between Catalonia and the rest of Spain. The Spanish Government has claimed the referendum of the region in the northwest of Spain is illegal.
In the upcoming trading week, US jobs will take center-stage, as we see the release of the US non-farm payrolls jobs report for September. Economists already expect the report to be weak, with just 130,000 jobs created during the previous month. The softer September jobs headline number is largely attributed to the disastrous weather seen in Texas and Florida.
We also see key manufacturing data from the German and US economies, and a potential market moving interest rate decision from the Reserve Bank of Australia, who are widely tipped to hike interest rates sooner rather than later.