Three Month Market Outlook EUR/USD

04/03/2016

Submitted to: Marie FinneganSubmitted by: Ronan O’Donnell

Three month market outlook for the EUR/USD

IntroductionThe following report is based on analysis of the next three months market outlook of the Euro

and Dollar currency. Its purpose is establish weather myself an importer of American

specialist’s cars should complete an order of cars worth $5 million using the forward rate or

the spot rate. To come to an accurate decision a fundamental and technical analysis will be

carried out to protect myself against any adverse fluctuations in the currency markets and

determine whether to buy $5million now using the forward rate of $1.133 or use on the

current spot rate on the 1st of June to complete the transaction. The report will then produce

an overall assessment of the market based on the technical and fundamental analysis and plan

its recommended trading strategy.

After producing this report, I am bearish the euro/dollar at advise on going with the current

forward rate $1.133 due to uncertainty in the global economy. The reasoning behind this

decision will be explained in the report.

Fundamental Analysis

The fundamental analysis will focus on four key areas Political Stability, inflation, purchasing power parity and interest rates. Each area will be discussed from a European and American point of view to reflect their current situations.

Political StabilityEurope: There is one major political concern currently in Europe and that is weather Britain will vote

yes to stay in the European Union or No to leave. The referendum will be held on the 23rd of

June 2016 in the lead up markets will become nervous which will result in a drop in

investment caused by the uncertainty of the result. It’s anticipated to be a very close vote

which could go either way. A major concern for the European Union is that a referendum to

leave is unprecedented and if Britain do successfully leave the Euro area it may open the door

for more countries to potentially leave and weaken the euro. (Wright, 2016)

The momentum is with the Brexit campaign which has the backing of six of David

Cameron’s cabinet ministers that have judged the deal for Britain to remain in the European

Union as not good enough. The very influential Mayor of London Boris Johnson has also

show his support for the Brexit campaign by backing “the vote to leave”. The markets reacted

and the euro strengthened against the pound as a result. (Jamieson, 2016)

America:Barack Obama is coming to the end of a successful term in office where the unemployment

rate has been reduced to 4.9% this is the lowest figure 2008 and 14 million jobs have been

created since he took office. Barack Obama provided America with a stable government that

was able to kick start the economy after the recession through smart and creative policies.

(Whiffin, 2016)

The current election race for the next American President is very hard to predict but their two

front runners for their respective parties are Donald Trump (Republicans) and Hillary Clinton

(Democrats). Donald trump as president would be unstable and not able to reassure markets

of his success because of the many variables associated with him as president such as

deporting all immigrants, placing tariffs on all imports and unsustainable spending. Hillary

Clinton is a stable candidate with a solid a campaign message that would provide a stable

government. The markets would react positively to Clinton as president. (Eagn, 2016)

Inflation and Purchasing Power ParityEurope: The slowdown in emerging economies and low commodity prices is causing major problems

for the recovery in the Euro Zone. This has led to The European Central Bank having to

revise its growth expectations for 2016 and warning that inflation may be slower than

expected. Throughout 2015 headline HCIP in the euro area was very low. Consumer prices

dropped from 0.3% in January 2016 to -0.2% in February. This is the first negative figure

since September when it was -0.1%. In the chart below the European inflation rate is

displayed which has been very volatile over last year. It has dipped into negative inflation

three times over the last year.

Core inflation in the Eurozone fell to -0.7%. A major influence on inflation is the falling

prices in the energy sector which have decreased by 8%. The Euro Zone is trying to deal with

variables such as the economic slowdown in China, the uncertainty closer to home associated

with terrorism, and a surge in the number of refugees entering Europe which may have an

adverse effect on inflation. President of the European Central Bank, Mario Draghi has said

that the ECB will review the situation at their next meeting in March and act if price stability

in the Euro Zone is threatened. (Draghi, 2016)

The purchasing power parity for the 28 countries of the European countries is 0.745. The

figure is considerably lower than the pre-recession figure of 0.820 in 2007. This has resulted

in a devaluation of the Euro vs the Dollar and many other currencies. This has benefited

Europe exports which have become more competitive. Exports have been aided by the

weaker purchasing power parity and price of oil. (OECD, 2016)

America:Inflation in the United States is expected to remain low in the next couple of months. The

inflation rate in United States is currently at 1.4%. It is not increasing faster due to the low

energy prices. The chair of the Federal Reserve Janet L. Yellen stated at a recent FOMC

meeting that she expects inflation to reach its 2% objective over medium term. We can see in

the chart below that the US inflation rate has been rising at a steady rate since October 2015

and is on course to reach the 2% objective later in 2016. (Yellen, 2016)

The purchasing power parity of the dollar has increased. The dollar is expected to appreciate

further against world currencies in 2016. This is as a result of the strong economic growth in

the US economy. The stronger purchasing power of the dollar has seen many US

multinationals increase their foreign direct investment in European countries such as Ireland

and Poland, the appreciation of dollar has made exports less competitive. (Bilton, 2016)

Interest RatesEuropeEuropean central bank has set interest rates low in the euro are in a bid to kick start the

economy. The ECB has decreased its deposit rate to -0.3% and left the refinancing rate

unchanged at 0.5% to encourage banks to lend money out and not hold onto it. The chart

below illustrates that the ECB has been constantly reducing interest rates as it seeks to

maintain price stability but also ensure the euro zone recovers from the recession. (ECB,

2016)

The ECB is also engaged in quantitative easing to the tune of €60 billion a month which may

be extended beyond March 2017. To combat the increase in downside risks due to volatility

regarding economic outlook of key emerging economies, heightened world financial

uncertainty and geopolitical risks. (Lewis, 2016)

America:In December the FOMC decided to increase the federal funds rate from 0.25% to 0.5% this is

the first increase in the federal funds rate since 2006. The funds rate increase due the strong

performance of the labor market and it is expected inflation will reach its 2% objective.

Further increases in the federal funds rate have not been ruled out in 2016 in the most recent

form meeting the fed said that it “expected to increase interest rates gradually”. (Appelbaum,

2016)

Technical Analysis

The technical Analysis will cover four time periods 6 months, 1 year, 3 years and 5 years,

providing information on moving averages, support and resistance lines. A mixture of

candlestick charts and line charts will be used over the time periods to interpret the

information. Moving averages have been used on all graphs to represent the daily changes in

the euro/dollar. All charts used in the he technical analysis have been taken from the financial

times interactive charts. (charts, 2016)

6 Month Technical Analysis

Chart 1

In chart 1 the euro/dollar starts off on an upward trend from $1.12 which peaks a $1.15 on the

7/10/2015.This peak is followed by a downward trend which bottoms out at $1.06 on the

2/12/2015. The euro rallies strong against the dollar on the 03/12/2015 to close up $1.09 the

euro has broken through its old resistance to create a new support level of $1.07 and a new

resistance $1.10. The new levels of support and resistance has not changed from December

2015 to March 2016.

Chart 2

There is several crossovers on chart 3 above which represent moment shifts in the euro/dollar

when it is strengthening and weakening. The latest crossover took place on the 29/02/16 it

was a downward shift for the euro/dollar.

1 year Technical Analysis

Chart 3:

In the chart 3 we can see that euro/dollar was very unstable from March 2015 to December.

In the first three months of the year there was three downward trends that where of offset by

up wards trends. In October there was a sharp downward trend. The euro/dollar established a

sideways trend to aid the support and resistance.

Chart 4:

In chart 4 there is a double bottom for euro/dollar between March and April 2015. The

euro/dollar has tried to lower that support but bounced off it. After the second bounce the

euro/dollar enters into an upward trend. There is two head and shoulders in March and

October that are below the resistance line and represent a downward trend in the euro.

3 year Technical Analysis

Chart 5

In chart 5 we can see that the first two crossovers April 2013 and December 2013 represent a

positive momentum shift for the euro/dollar. This is followed up by negative momentum shift

in April 2014 where euro enters a downward trend and does stabilize until April 2015 and

continues to fluctuate between positive and negative momentum shifts in the euro/dollar.

Year 6 Technical Analysis

Chart 6

In chart 6 we can see the beginning of a downward trend that last from June 2011 until July

2012. This is followed by upward trend which does not reach the previous high of June 2011.

The euro/dollar enters into a sharp downward trend in February 2014 and fails to recover.

Market Overview

The findings of the fundamental and technical analysis in this report on the Euro/Dollar

currency. Have highlighted the global economy plays a major part in the exchange rate

factors out of the control of the ECB and FED such as the low price of oil, slow economic

growth in emerging economies and the poor economic performance of China are key

influencers of the exchange rate. There is also the impending referendum in Britain which

poses concern to markets and investors.

The fundamental analysis in this report highlighted that the ECB is struggling to reach its 2%

target with inflation currently at -0.2%. The ECB has reacted with negative interest rates and

a stimulus program which is due to last until March 2017. The Fed is on target reach its 2%

inflation target over the medium term with inflation currently standing at 1.4%. The Fed is

completing raising federal funds rate for the second time in a year. The American economy is

performing strongly especially the labor market.

The technical analysis in this report of the euro/dollar exchange rate highlight past price

movements in the exchange rate. The report was able to clearly identify that there is

downward trend in the euro/dollar with a lack of investors buying in the market the supply

demand is expected to weaken further.

Recommended Trading Strategy

After producing this report I have come to the decision that I am bearish the euro/dollar based

on the fundamental and technical analysis I believe that the euro/dollar will have depreciated

below the expected forward rate of $1.133 in the next three months. There is just too much

uncertainty surrounding the global economy currently and I expect a few a shocks to test it

further between now and the 1st of June. I believe that the euro will be around the $1.07 –

$1.09 in three months time. This why the recommended trading strategy is to purchase the $5

million dollars now using the current forward rate.

Bibliography

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[Accessed 29 02 2016].

charts, F. I., 2016. Financial Times. [Online]

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