Financial Markets (Trading) report.

1.0 EUR/USD Exchange Rate

Figure 1: EUR/USD July 2019 – July 2020

EUR/USD has been very volatile with daily fluctuations. With a more significant decline in August 2019, they were back up in mid-October 2019 due to economic factors. However, fluctuations were more dramatic since the beginning of 2020, hitting an all-time low of 1.067 and an all-time high of 1.15. In addition to the contributing economy factors, the Covid-19 pandemic may have been an influence on the swing.

2.0 Historical Forecast

2.1 Inflation:

Figure 2: EUR/USD Respective Inflation Rate

https://tradingeconomics.com/euro-area/inflation-cpi

Figure 3: Demand – Supply Model of Euro (Inflation Rate)

Figure 2 shows both countries inflation rate increasing (with Euro at a higher rate), denoting a positive relationship. Euro having a higher inflation rate will result in less demand for exports, therefore lesser demand of Euro and a higher demand for imports, resulting in a higher supply of Euro. Thus, with Euro experiencing a higher inflation rate most of the time, it causes the Euro currency to depreciate against the US Dollars.

2.2 Interest Rate:

Figure 4: EUR/USD Respective Interest Rate

https://tradingeconomics.com/euro-area/interest-rate

Figure 4 show Europe interest being stagnant at 0% throughout the entire year, with European Central Bank (ECB) making no progress to adjust it. Hence, from this observation, the historical rates of Europe alone may not be a reason for the change in EUR/USD rates.

Figure 5: Demand – Supply of Model of USD (Interest Rate)

However, in comparison to the US interest rate that dropping to 0.25% in March, it was an aggressive measure to preserve and encourage capital inflow, increasing the demand for US Dollars. Hence, this net effect of appreciating US Dollars translates to a depreciating Euro.

2.3 Commodity Prices:

Figure 6: Demand – Supply of Model of Euro (Commodity Prices)

Europe is US second biggest supplier for agriculture commodity. With the recent ongoing pandemic agriculture commodity received a demand ‘shock’ when lockdown first begun. With agriculture being a necessity in life, US will continue importing agriculture from Europe to meet their demand. Hence, agricultural prices rocketed, causing an increase in the value of Euro exports, leading to an appreciation in Euro. This is evident in Figure 1 when EUR/USD hit an all-time high of 1.15 in March when their lockdown began.

3.0 Forecast

3.1 Inflation:

Figure 7: Forecast Europe Inflation Rate

Figure 8: Forecast US Inflation Rate

According to Trading Economics global macro models and analysts’ expectations, Euro inflation rate is forecasted at 1.30 percent by the end of 2020. https://tradingeconomics.com/euro-area/inflation-cpi

While US inflation rates are expected at 1.10 percent by the end of 2020. https://tradingeconomics.com/united-states/inflation-cpi

Hence, the supply and demand model of Euro inflation rate will be the same as Figure 3, with lesser demand of exports and less demand of Euro but with more demand for imports and more supply of euro. Thus, the forecasted inflation rate increases, causing Euro to depreciate and EUR/USD exchange rate to decrease.

3.2 Interest Rate (Forecast)

Figure 9: Forecast Europe’s Interest Rates

As the ongoing pandemic has a long-lasting effect, Euro interest rate is still forecasted to be 0% until the end of 2020. ECB believes that such bold stance would be positive for both the financial market and the real economy.

https://www.focus-economics.com/country-indicator/eurozone/interest-rate

Figure 10: Forecast US Interest Rates

As a continuous measure for the Federal Reserve to support the US economy, its forecasted interest rate is 0.25% until the end of 2020, remaining constant since its drastic drop in March.

https://www.cnbc.com/2020/06/10/fed-meeting-decision-interest-rates.html

Thus, with both countries forecasted interest rate remaining constant, Figure 5 still stands with a depreciating Euro.

3.3 Commodity Prices:

Despite Europe’s measures to curb agriculture prices, prices are still predicted to increase, with Euro further strengthening against USD. Due to the lockdown, Europe took some time to recover from the demand ‘shock’ and were unable to match the supply to market equilibrium. http://www.oecd.org/coronavirus/policy-responses/covid-19-and-international-trade-issues-and-actions-494da2fa/. Also, as commodity prices surge with inflation, they are often used to hedge against the decrease in buying power of the currency.

Hence, Figure 6 still stands for the forecast of commodity Euro appreciates and exchange rate increases.

4.0 Prediction (July – December 2020)

With the ongoing pandemic, most investors take a bearish stand where they are pessimistic about the future and are selling away their holdings. However, my predictions would be bullish on EUR/USD as EUR is predicted to strengthen and appreciate based on the above determinants.

Therefore, my take would be to buy EUR/USD with expectations that it will rise versus the US Dollar.