Pound-to-Dollar Eyeing 1.40 after US Election Upset Places Trump Tax-bill Under Renewed Threat

Democrat victory in Alabama erodes Republican majority at a time when not all senators are on-board with tax-plan. Strategists eye 1.40 for GBP/USD in months ahead.

The Dollar traded lower against much of the G10 basket Wednesday after a by-election for the Alabama senate seat saw a Republican Party stronghold flip to the Democratic Party, eroding the Republican majority in the senate.

Democratic candidate Doug Jones beat Republican Roy Moore by a a narrow 1.5% margin to clinch a win in a state that hasn’t elected a Democratic Party lawmaker in a generation.

“Democrat Doug” has added an additional twist to the US political story. Significant fiscal easing just got harder and there’s nothing here to help the dollar,” says Kit Juckes, chief foreign exchange strategist at Societe Generale.

Wednesday’s upset erodes the Republican majority in the senate, leaving the party a 51-49 seat split in the upper house, which could have significant implications for President Trump’s tax-reform bill and the government’s ability to move forward on other policies.

Threats to the tax bill are further underlined by the fact that not every Republican in the senate is fully on board with the plan, with some having concerns over its likely impact on the deficit and others dissatisfied with its implications for the Affordable Care Act.

“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,” says Viraj Patel, a foreign exchange strategist at ING Group.

"Looking ahead, we wouldn't underestimate the broader political woes this may have for the US dollar in a mid-term election year."

Quite apart from Wednesday’s implications for tax reforms, on which much of the Dollar’s recent gains are dependent, Wednesday’s outcome could be interpreted as a signal of what might be to come in November.

The midterms in November 2018 will see all 435 seats in the House of Representatives and 33 of the 100 Senate seats up for grabs. Currently the Republican Party enjoys a majority in both the House and the Senate. 

“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,” adds Patel.

ING forecasts the Pound-to-Dollar rate will rise gradually to 1.40 over the coming months, should Brexit negotiators get the all-clear to move on to discussions of trade and they make progress toward agreeing a transition deal.

“Sufficient progress” and agreement on a transitional deal would remove part of the cloud of uncertainty that has hung over the UK economy since the Brexit referendum of 2016.

“This is certainly part of our 1.40 call – we see cyclical recoveries in most countries including the UK (which is coming from a relatively low base post-Brexit), while the US economy’s late-cycle woes will be compounded by a very fragile US political backdrop. So certainly a reassessment of US politics in early 2018, is another reason why we look for GBP/USD to gain a bit of an uplift towards 1.40,” Patel told Pound Sterling Live Wednesday. 

Alabama voted by a margin of 62.1% to elect President Donald Trump in November 2016 but Washington was unable to muster enough local support for its candidate on Wednesday.

After beating rival Luther Strange in a primary vote for the republican nomination, candidate Roy Moore became subject to allegations of sexual harassment over the course of November. This could have damaged his standing in the southern state. 

Nonetheless, broader dissatisfaction with the government and Washington lawmakers cannot be ruled out either and so recent events and November’s midterms may represent yet another hurdle for further US Dollar gains in 2018.

The US Dollar index was marked 0.07% lower at 94.02 during morning trading in London Wednesday. The Pound-to-Dollar rate was quoted 0.28% higher at 1.3354 and the Euro-to-Dollar rate was called 0.02% lower at 1.1740.

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