A few days ago, the French people voted in the first round of a truly historic presidential election. Centrist Emmanuel Macron (24.01%) and nationalist Marine Le Pen (21.30%) have now advanced to the run-off on May 7th. Markets reacted positively to the result, with the Euro strengthening against the US Dollar in the hope of a Macron victory.
However, volatility could yet return, with the French legislative elections coming hard on the heels of the presidential election. Both Le Pen and Macron need to get as many votes as possible in these legislative elections, since the ability of the new French president to implement reforms will depend largely on their support in the National Assembly.
The Pace of President Trump’s Reforms
President Donald Trump famously predicted that he would do "great things" during his first 100 days in office, and another major policy announcement before end of this period was widely expected. He has already struggled to deliver on several of his campaign promises, such as the pause on immigration from certain countries and the replacement of Obamacare.
His plan for tax cuts, revealed on Wednesday, includes various ideas put forward on the campaign trail, but uncertainty remains as to how the president will finance his spending plans after significantly reducing government revenues. Negotiations on Capitol Hill are likely to be fraught and congressional approval is by no means guaranteed.
As the New York Time put it: “President Trump on Wednesday proposed sharp reductions in both individual and corporate income tax rates, reducing the number of individual income tax brackets to three — 10%, 25% and 35% — and easing the tax burden on most Americans, including the rich. […] The plan would include a special one-time tax to entice companies to repatriate cash that they are parking overseas. […] A 15% business tax rate would apply not only to corporations, but also to small businesses and other large owner-operated conglomerates”.
The plan could well have a positive impact on the US economy. Significant reductions in tax rates would create incentives for entrepreneurs and could increase labour force participation. Higher levels of personal investment could also be encouraged, but this will depend on changes in interest rates.
President Trump’s tax reforms are principally designed to reduce unemployment and spur consumer spending. A more favourable environment for business could increase inflationary pressures, especially in terms of rising wages, which could accelerate the rate of Fed Funds hikes, influencing the value of the US Dollar.
The USD Could Benefit from the Prospects of a Tightening of US Monetary Policy
All decisions made by a central bank influence the cost and availability of money in the economy. This has a direct impact on the supply of and demand for the national currency, and more generally on the foreign exchange market.
When a country’s interest rate rises, this attracts foreign investors because the demand for that currency is higher. Thus, the value of this currency will increase relative to other currencies. Higher interest rates also increase borrowing costs, reducing the availability of money in the markets, which will further increase the value of the given currency.
However, volatility could yet return, with the French legislative elections coming hard on the heels of the presidential election. Both Le Pen and Macron need to get as many votes as possible in these legislative elections, since the ability of the new French president to implement reforms will depend largely on their support in the National Assembly.
The Pace of President Trump’s Reforms
President Donald Trump famously predicted that he would do "great things" during his first 100 days in office, and another major policy announcement before end of this period was widely expected. He has already struggled to deliver on several of his campaign promises, such as the pause on immigration from certain countries and the replacement of Obamacare.
His plan for tax cuts, revealed on Wednesday, includes various ideas put forward on the campaign trail, but uncertainty remains as to how the president will finance his spending plans after significantly reducing government revenues. Negotiations on Capitol Hill are likely to be fraught and congressional approval is by no means guaranteed.
As the New York Time put it: “President Trump on Wednesday proposed sharp reductions in both individual and corporate income tax rates, reducing the number of individual income tax brackets to three — 10%, 25% and 35% — and easing the tax burden on most Americans, including the rich. […] The plan would include a special one-time tax to entice companies to repatriate cash that they are parking overseas. […] A 15% business tax rate would apply not only to corporations, but also to small businesses and other large owner-operated conglomerates”.
The plan could well have a positive impact on the US economy. Significant reductions in tax rates would create incentives for entrepreneurs and could increase labour force participation. Higher levels of personal investment could also be encouraged, but this will depend on changes in interest rates.
President Trump’s tax reforms are principally designed to reduce unemployment and spur consumer spending. A more favourable environment for business could increase inflationary pressures, especially in terms of rising wages, which could accelerate the rate of Fed Funds hikes, influencing the value of the US Dollar.
The USD Could Benefit from the Prospects of a Tightening of US Monetary Policy
All decisions made by a central bank influence the cost and availability of money in the economy. This has a direct impact on the supply of and demand for the national currency, and more generally on the foreign exchange market.
When a country’s interest rate rises, this attracts foreign investors because the demand for that currency is higher. Thus, the value of this currency will increase relative to other currencies. Higher interest rates also increase borrowing costs, reducing the availability of money in the markets, which will further increase the value of the given currency.
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