US Dollar Fails to Ignite Despite Progress for Trump on Healthcare, Can the Fed Light a Fire Under USD?

One of the key events we have been watching in global FX over the past 24 hours is how the Dollar would react to the latest machinations of the US Congress.

Senate Republicans on Tuesday took a tentative step toward fulfilling seven years of promises to repeal the Affordable Care Act (ACA).

The Republicans united behind a procedural vote which now allows the Senate to open debate on repealing and replacing the ACA, also known as Obamacare.

That we are discussing such fine details of US politics in the context of the Dollar is telling.  

Recall, for the US Dollar it is not so much issues of health legislation that matter, but rather signs that President Donald Trump commands the necessary influence on lawmakers to pass his plans on taxation and spending.

So surely now that Trump is gaining leverage, the Dollar should have risen?

Looking at the markets it would appear Dollar-bulls have been disappointed; the Pound to Dollar exchange rate is more or less where it was 24 hours earlier, the Euro to Dollar exchange rate still holds near recent highs and the broader US Dollar basket is up a mere 11%.

So why are markets so unenthused?

While the Senate passed a ‘motion to proceed’ on a healthcare bill vote, a later vote on Senate Majority Leader Mitch McConnell’s BCRA failed by 43-57 with nine Republican senators voting against.

The BCRA is the Better Care Reconciliation Act - the Republican's answer to Obamacare.

In the day ahead, senators will vote again (on a repeal-with-delay bill championed by Rand Paul, also expected to fail).

That will then be followed by more debate and if all goes well for McConnell, a vote on a real bill by the end of the week.

Readers might want to study up on how US politics work, but the takeaway for those watching the US Dollar is simply this - Trump is not having an easy time getting legislation through Congress.

“For now healthcare reform looks as distant as ever, only marginally closer than 24 hours ago,” says Elsa Lignos, an analyst with RBC Capital Markets.

And this confirms that enthusiasm amongst currency traders for Trumps promises on lower taxes and increased infrastructure spending remains in short supply.

The Dollar will have to struggle for longer it would seem, until such a time that the President is able to garner the gravitas and support required to push through his campaign promises.

“While further progress on healthcare legislation remains very much an open question, we see scope for some further squeeze on USD shorts on Wednesday if the FOMC telegraphs balance sheet tapering,” says Manuel Oliveri, a currency analyst with Credit Agricole.

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US Federal Reserve Update Due

Taking centre stage over the course of the next 24 hours for the Dollar will however be the US Federal Reserve.which delivers its July policy update and guidance. 

No changes to interest rates are expected and no major policy announcements are due either.

However, markets will be looking for hints that the Fed intends to start reducing its balance sheet; widely tipped to proceed in September.

Credit Agricole economists expect a change in the statement to that effect, indicating that balance sheet normalisation were to start “relatively soon”, which would be consistent with a September announcement.

But this pro-USD element of the FOMC statement could be tempered by some greater expression of concern over inflation, similar to Chair Yellen’s Congressional testimony.

Whether the Dollar can find some positive impetus from the event is unlikely.

"The USD's biggest problem, is it can't expect help from the Fed for a long time, and that won't change following the July FOMC meeting, says Alan Ruskin, Macro Strategist with Deutsche Bank in New York.

Ruskin says the Fed will play second fiddle to technical signals in driving FX through the summer.

"For the moment this is an FX market that is prepared to trade the key EUR pair, one level at a time," says Ruskin.