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IND IVI DU AL MA

S T U D E N

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1.1.

Executive summary

This report will mainly focus on analysing one currency pair: EUR/USD. It will provide historical data such as inflation, GDP growth, interest rates and government factors. These are also known as foreign exchange factors, which are the means in which a country’s level of economic health is determined. Additionally, in this report financial market theory and macroeconomics will be applied in order to analyse the aforementioned factors. After analysing the factors, future exchange rate predictions for the next 3 to 6 months will be made.

1.2.

EUR/USD FX past performance

EUR/USD March 2019 – September 2019 (from Eikon 15 September) As the chart above shows, there has been a lot of fluctuation within this exchange rate. In the past six months, the highest point was on the 20th of March, at 1.14% and the lowest point was on the 2nd of September, at 1.10%. At this point, EUR/USD hadn’t traded at 1.1000 for more than two years, which attracted a range of option interest, like barriers and triggers that reinforced 1.10’s significance as a major support level (Eikon 2019). The effect on option interest with barriers and triggers is called a long gamma, which will turn short when the barriers are erased. It shows that dealers are anxious about the EUR/USD vols rate and so they buy shorter vols in order to reduce the volatility risk.

1.3

GDP growth

Euro Area’s GDP annual growth rate 2017-2018 (World Bank)

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As shown in the chart above, the Eurozone’s GDP growth rate in 2018 was higher by 1.8% compared to 2017. As a result of Italy’s stagnant growth under it’s new populist government, US trade hostilities with China and Europe, uncertainty over Brexit and political instability, economic growth within the Eurozone has been at a record low (The Guardian 2018).

USA’s GDP annual growth rate 2017-2018 (World Bank) As shown in the chart above, USA’s GDP growth rate in 2018 was higher by 2.9% compared to 2017. Although wage growth has remained stagnant, the rise of consumer spending, exports, business investment and the Trump government’s tax cuts have all contributed to the steady growth (The Guardian 2018).

1.4.

Interest rate

Europe’s interest rate 2016 – 2018 (Tradingeconomics.com) The European Central Bank (ECB) left the main refinancing operations rate unchanged nd lowered the deposit interest rate by 10bps to -0.5% during its September meeting (Tradingeconomics.com, 2018). As an attempt to boost economic growth after global trade tensions and the uncertainty of Brexit, policymakers approved a round of monthly bond purchases of 20 billion euros as of November 1st 2019.

USA’s interest rate 2015-2017 (World Bank)

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USA’s interest rate has been almost stable throughout the past 3 years, which shows a positive trend and a healthy growth since the end of the financial crisis.

1.5.

Government factors

European Union Although the Forex rate depends on the future events of both countries, I believe that EUR will decrease. This is because the ECB cut interest rates to -0.5%, and also announced monthly bond purchases of 20 billion euros per month starting November 1st 2019 (FXStreet, 2019). They also introduced a reserve system that would exclude bank holdings from negative rates. The decision is said to be the result of inflation remaining muted and the risk of growth remains on the downside. Keeping the interest rate at a negative to low rate could attract more investors to the Eurozone however with the uncertainty of Brexit, this could result in the decline of EUR in the next 3 to 6 months. USA The USD has shown a rise in volatility lately, however that hasn’t provided clear direction of the market. The announcement of the US Federal Reserve in the coming week promises steeper rate cuts which will allow for domestic growth and consumption. The details of the cut and future movements are integral to the reaction of the market, which is why I believe that the USD will increase in the next 3 to 6 months. 1.6.

Prediction

Based on the analysis of past performance, economic growth, interest rates and government factors between the European Union and USA, I believe that EUR will depreciate but USD will rise. Therefore, EUR/USD will rise in the next 3-6 months.

References Kicklighter, J. (2019). US Dollar Faces High Volatility but Unpredictable Direction with Fed Decision. [online] DailyFX. Available at: https://www.dailyfx.com/forex/technical/article/fx_technical_weekly/2019/09/15/US-DollarFaces-High-Volatility-but-Unpredictable-Direction-with-Fed-Decision.html [Accessed 16 Sep. 2019].

Rushe, D. (2019). US economy growing at annual rate of 4.1%, fastest pace in four years. [online] The Guardian. Available at: https://www.theguardian.com/business/2018/jul/27/useconomy-report-second-quarter-commerce-department [Accessed 16 Sep. 2019].

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Elliott, L. (2018). Eurozone growth slumps to lowest level in more than four years. [online] The Guardian. Available at: https://www.theguardian.com/business/2018/oct/30/eurozonegrowth-slumps-to-lowest-level-in-over-four-years [Accessed 16 Sep. 2019].

Ferreira, J. (2019). Euro Area Interest Rate | 2019 | Data | Chart | Calendar | Forecast | News. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/euroarea/interest-rate [Accessed 16 Sep. 2019].

Bednarik, V. (2019). EUR/USD Forecast: ECB done, Fed to come. [online] FXStreet. Available at: https://www.fxstreet.com/analysis/eur-usd-forecast-ecb-done-fed-to-come201909131517 [Accessed 16 Sep. 2019].

Pace, R. (2019). BUZZ-COMMENT-Beware huge EUR/USD short gamma below big 1.10 barrier - Reuters. [online] Thomson Reuters. Available at: https://apac1.apps.cp.thomsonreuters.com/web/Apps/news-monitor [Accessed 16 Sep. 2019].

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