Finance & Capital Markets Continuous Assessment

3 Month Outlook for Euro/Dollar

RYAN ALILECHE – G00260743

Ryan Alileche G00260743

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Student Name: Ryan Alileche

Student Number: G00260743

Programme: Business (Hons) Economics & Finance

Year: 4

Module: Finance & Capital Markets

Lecturer: Marie Finnegan

Assignment Title: Continuous Assessment

Due Date: 4th March 2016

Date Submitted: 4th March 2016

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Table of Contents

Fundamental Analysis of Euro/Dollar page 3

Interest Rates page 3

Political Stability page 5

Trade and Economic Policies page 6

Summary of Fundamental Analysis page 7

Technical Analysis page 8

Chart 1 page 8

Chart 2 page 9

Conclusion page 9

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This Report is an analysis of the Euro/Dollar exchange rate. Based on the research conducted it is forecasted

that the Euro will weaken in comparison to the dollar. This report and its analysis shows that the Euro is

bearish.

Fundamental Analysis of Euro/Dollar

Conducting fundamental analysis of the Euro/Dollar Exchange Rate consists of analysing the economic

factors that affect the strength of both currencies. Interest Rates, Political Stability or Instability and trade

deficits are the most common factors. As of Tuesday 1st of March 2016 the Euro/Dollar Spot Rate currently

sits at 1.08. The rate has fluctuated much over the past 6 months ranging from a near all-time low of 1.05 in

May 2015 to 1.16 in August 2015. Since the turn of the New Year the rate seems to be drifting between 1.07

and 1.09 (XE, 2016)

Interest Rates

In the United States the Federal Reserve (FED) sets the interest rates for banks to borrow money. The FED

have their own objectives which include managing the monetary supply, controlling and limiting inflation

through price stability, reducing unemployment and strengthening the United States position in the global

economy.

The FED raised the Federal Funds Rate, on the 16 th December, for the first time in over a decade, from 0 –

0.25 to 0.25 – 0.5.

“Given the economic outlook, and recognizing the time it takes for policy actions to affect

future economic outcomes, the Committee decided to raise the target range for the federal

funds rate to 1/4 to 1/2 percent. “ (FOMC, 2015)

By raising the interest rate the FED is increasing the costs on banks for overnight lending. This means that

banks can’t be reckless with their lending and also helps to control money supply which in-turn lowers the

rate of inflation which strengthens an economy and its currency.

The FED see this rise as the beginning of a normalisation of the Interest Rate which will see a rise of 2%

over 2016 through quarterly rises. Whether or not the FED proceeds with this plan remains to be seen

however because the rates are so low and the US economy is starting to pick up its very likely that they will.

Rising the interest rate is generally only done in times when an economy is stable and can afford to increase,

so by increasing the rate the FED is showing confidence in the economy.

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The administrators and controllers of monetary policy for the Eurozone is the European Central Bank

(ECB). The primary objective of the ECB is to maintain price stability. In the Eurozone the ECB interest

rate is known as the Refinancing Rate. This rate is the rate in which banks have to pay on money borrowed

from the ECB.

Currently the refinancing rate is 0.5%. (Central Bank of Ireland, 2016) This rate is very low especially when

you consider that the ECB is trying to achieve economic growth and an inflation rate of 2% and the rate is

currently less than 0.5% as indicated in the chart bellow

(Speciale & Siedenburg, 2016)

The Inflation rate in Europe has been bellow it’s 2% objective since 2012 and to try and kick-start an

increase the ECB have put negative interest rates on deposits for banks, encouraging them to loan and

penalising them for making deposits in the ECB, and also engaged in quantitative easing. The ECB hope by

having low interest rates that banks will lend more and pass more money on to consumers however this

hasn’t been the case so far and it is anticipated that the ECB will further increase the negative deposit rates,

which is charged to banks based on their deposits, in March. At present many banks feel that the negative

deposit charge cuts into their profits and margins and makes it more difficult for them to give out loans

(RTE, 2016) The ECB tend to disagree with the banks and executive board member Benoit Coeure had this

to say on the matter:

“Many banks have been able to more than offset declining interest revenues with higher

lending volumes, lower interest expenses, lower risk provisioning and capital gains, …

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Last year, for example, euro area banks’ aggregate net interest income increased,

especially as crisis-hit banks refinanced expiring high-yield liabilities,"  (RTE, 2016)

In contrast, Deutsche Bank, one of Europe's top banks, maintained that losses on deposits retained with the

central bank are increasing, making lending more expensive and actually holding back progression. How

this affects the Euro/Dollar exchange rate is that it casts uncertainty, doubt and a lack of faith in the

monetary policies and decision making of the already extremely scrutinised ECB. This doubt causes the

Euro to weaken in the global market and thus can cause its strength against other currencies to suffer.

Political Stability

Probably the main talking point around the world is the upcoming U.S elections and the reality that a new

president will be in charge by the end of the year. In the US the presidential elections are big business and

most candidates spend much of their time convincing the nation that they are fit to lead the nation. However,

this election is pretty unique as for the first time in a long time a person most controversial and seemingly

unfit to do the job has found themselves as a front running candidate. Donald Trump has some extraordinary

policy stances such as mass deportation of immigrants, they construction of a physical wall on the

US/Mexico border, ban the entry of Muslims into the US and also combat China over issues he feels are

prevalent which is the devaluing of the Dollar and lax attitude towards US owned intellectual properties

(Lussenhop, 2016).

Despite his controversial ideas he is one of the leading republican candidates. How this effects Euro/Dollar

is that it obviously casts doubt over the economy when a person with such ridiculous policy ideas is even in

contention to be president, ignoring the fact that he could actually win. Trump has no experience in any sort

of political role and despite his undoubted business success and expertise he wouldn’t bring much stability

to the US economy in a crucial time of expected growth.

In Europe, the European Union (EU) and its member states are going through a time of continuous change.

Across Europe many countries are in election year or else its fast approaching. Many member states such as

Ireland are electing new leaders and so many formerly niche or small parties are becoming popular. These

smaller political parties have very little experience running a country or if they have experience it might not

have been successful but because citizens want change these inexperienced parties could find themselves in

power. These potential changes in political leaders can cause political instability in the EU

Another main cause for instability in the EU is the possible break-away of Britain from the EU. In June

British citizens will vote in a referendum on whether the UK should stay or leave the EU. It’s been a long

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Ryan Alileche G00260743discussed topic and PM David Cameron has been vocal in his belief that the UK should remain in the EU.

On the topic of EU membership Cameron said

"Having that seat at the table in the EU -- just as being a member of NATO -- is a vital

way that we project our values and our power and our influence in the world."

(Whiteman, 2016)

Mayor of London Boris Johnson has been extremely vocal in his belief that the UK should leave the EU.

"The last thing I wanted was to go against David Cameron or the Government, I will be

advocating Vote Leave or whatever the team is called -- I understand there are many of

them -- because I want a better deal for the people of this country, to save them money

and to take back control." (Whiteman, 2016)

Detractors claim involvement of the EU is a costly problem that brings regulations and too much migration.

Supporters argue membership is beneficial for the economy and exiting could be an expensive cataclysm.

The UK doesn’t and never will adopt the Euro however their involvement in the EU is vital to growth. If

they were to leave the EU trade and movement of labour would be seriously hindered which would cause the

Euro to lose value. The political uncertainty in both EU and US regions is very high however its less of a

concern in the US as political uncertainty is rife in the EU at the moment.

Not only are the UK considering an exit from the EU but also Greece. The Greek exit from the Eurozone

would be to allow them to deal with its extraordinary public debt. Their potential exit could bring a domino

effect and cause other nations to leave. The exit of Greece could destabilise the Euro and potentially weaken

bonds and the share market.

Trade and Economic Policies

The United States is the world’s largest exporters of goods and services with these dealings valued at $2.3

Trillion. Trade is crucial to the US in growing and expanding its economy. Trade keeps the American

economy open and helps to make it an easy place to do business and deal with. Trade helps to create jobs

and improve the quality of living for people. In the US the trade deficit was $44.3 Billion in December. The

US has been run constant trade deficits since 1976 due to high imports of oil and consumer products.

(Trading Economics, 2016)

Asia and in particular China have been major partners in trade for the US. In china however there are fears

over the strength of its economy and despite experiencing its slowest growth rates in 25 years Chinese

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Ryan Alileche G00260743finance Minister Lou Jiwei recently addressed the G20 and assured members that China was fully aware and

combating the economic problems it was faced with. The slowdown in China's economy has generated

significant uncertainty in financial markets and sharp falls in commodity prices have been experienced.

(BBC News, 2016)

How this effects the strength of the US Dollar is that if the US trades less with china its income falls and this

weakens its economy which in turn devalues it’s currency. To combat these fears over Asian markets The

US and the 10 participants of the Association of Southeast Asian Nations (ASEAN) have agreed to “further

deepen ties and job-promoting trade and economic opportunities” (Saulon, 2016)

In the EU, free movement of workers and trade is available to all member however if The UK does exit the

EU then trade will be heavily affected which would cause the value of the Euro to fall as economies would

weaken from the loss of trade revenue.

Summary of Fundamental Analysis

Research has shown than the EU at the moment is in a very weak position. It’s low interest rates, slow

growth and political instability is lowering the value of the Euro and while these issues are also common in

the US they are not affecting the dollar as much so in the coming months it can be expected for the

Euro/Dollar spot rate to fall to 1.06

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Technical Analysis

Chart 1

The Green line shows a support trend line. Just recently the value broke through this line which means a new

lower level of support will be established. The 50 day moving average (Blue line) is varying however it

appears to be on a downturn. The 50 day moving average is below the 200 day moving average which shows

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Ryan Alileche G00260743that the downward trend isn’t yet near reversing. The 200 day moving average is almost straight and hasn’t

even reached 1.11. This supports Euro/Dollar decreasing.

Chart 2

In this Chart the green trend line shows support initially but after this was broken it has the potential to act

as resistance as the rate has yet to reach it or pass it. The black trend line shows the current resistance trend.

The resistance shows that there are higher highs and shown by the yellow support line there was up until

recently higher lows. The 50 day moving average is just below the 200 day moving average however it did

break though however fell below it soon after. They are still close and could be argued that the 50 day is

close to breaking through again as the 200 is low but this remains to be seen.

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Ryan Alileche G00260743Conclusion

Based on the fundamental and technical analysis it is apparent that the value of the Euro/Dollar will continue

to drop. With regard to the 3 month forward rate of 1.13 (Sourced from Financial Times, 26/2/16 at 11am) it

is advised that this rate is used as it will be significantly higher than the spot rate, even if the Euro improves

it’s highly unlikely that it will be more than this value.

BibliographyBBC News. (2016, March 1st). China seeks to assure G20 over its economy. Retrieved from BBC News:

http://www.bbc.com/news/business-35666301

Central Bank of Ireland. (2016, Febuary 29th). ECB Interest Rates. Retrieved from CentralBank.ie: https://www.centralbank.ie/polstats/stats/Pages/interestrates.aspx

FOMC. (2015, December 16th). Press Release. Retrieved from Federal Reserve: http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm

Lussenhop, J. (2016, March 1st). Donald Trump: 22 things the Republican believes. Retrieved from BBC News: http://www.bbc.com/news/world-us-canada-34903577

RTE. (2016, March 1st). Euro zone banks can deal with ultra low rates - Coeure . Retrieved from RTE.ie: http://www.rte.ie/news/business/2016/0302/772023-ecb-negative-interest-rates/

Saulon, V. V. (2016, March 1st). US, ASEAN members agree to boost trade ties. Retrieved from Business World Online: http://www.bworldonline.com/content.php?section=Economy&title=us-asean-members-agree-to-boost-trade-ties&id=123345

Speciale, A., & Siedenburg, K. (2016, March 2nd). Euro-Area Inflation Rate Seen Heading Back to Zero Again. Retrieved from Bloomberg: http://www.bloomberg.com/news/articles/2016-02-26/euro-area-disappointments-mount-as-inflation-estimates-missed

Trading Economics. (2016, March 1st). United States Balance of Trade. Retrieved from Trading Economics: http://www.tradingeconomics.com/united-states/balance-of-trade

Whiteman, H. (2016, March 1st). Brexit: Mayor of London Boris Johnson to campaign for UK to leave EU. Retrieved from CNN: http://edition.cnn.com/2016/02/21/europe/britain-boris-johnson-eu-brexit/

XE. (2016, February 2nd). XE Currency Charts. Retrieved from XE.com: http://www.xe.com/currencycharts/?from=EUR&to=USD&view=1W

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