USD: Alabama elections a precursor to a fragile US political backdrop in 2018 - ING

US politics, the Fed and CPI data means the $ may be in for a bumpy ride today, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“In what could be seen as a precursor to US politics in 2018, President Trump and the Republicans were left somewhat red-faced when their candidate Roy Moore lost the Senate Alabama elections to Democrat Doug Jones. The initial focus for financial markets will be on the knock-on effects this has for a tax bill being passed through the Senate – where the Republicans now have a slender 51-49 majority. With the likes of Senators Rand Paul and Susan Collins still not fully on board with the current package, we still believe that there are major political hurdles to be cleared to get any tax bill over the line. Looking ahead, we wouldn't underestimate the broader political woes this may have for the US dollar in a mid-term election year; a more uncertain US political backdrop – coupled with better growth opportunities elsewhere – is partly why we think investors have stronger incentives to shy away from US assets in 2018.”

“This all makes today’s FOMC meeting – and Chair Yellen’s final press briefing – a relatively mundane affair. Beyond sticking to the status quo of counting on a dormant Phillips Curve to suddenly wake up, it will be interesting to gauge how much conviction Fed officials have over the transitory nature of low US inflation. We identify the 2018 median core PCE inflation estimate as a litmus test; after ticking down to 1.9% in Sep, any further move lower would suggest that the Fed are more worried about the persistence of low price pressures.”

“On this note – and ahead of the Fed meeting – we’ll get the Nov US CPI report; the headline print may be distorted by gasoline prices, meaning that core CPI is the one to watch. At 1.8% YoY, we are set to stay below the Fed’s target.”

“Bar any positive US CPI surprise today, we look for the USD to come under some pressure – not least as we expect the classic ‘buy the rumour, sell the fact’ type of reaction around the Fed hike. A sharper DXY retrace could see 93.30 tested.”