Financial Market- JPY/USD Analysis

The Euro (EUR) is the second most used currency globally with an estimated amount of 341 million users daily. A total of 37 countries uses EUR. The European Central Bank (ECB) is the only central bank managing the EUR.

2.4.1 Past and Present Currency Analysis

Over the past one year, the EUR has a depreciating trend against the USD. From 20 February onwards, the EUR started to appreciate against USD. The spot rate from 11 March 2019 to 10 March 2020 increased from 1.1247 to 1.1347, a total of 1000 pips. The highest recorded value of EUR against USD is 1.1447 on 9 March 2020, while the lowest recorded value is 1.07847 on 20 February 2020. 

Figure 1: EUR/USD Spot Rate 11 March 2019 – 10 March 2020 (Eikon, 2020)

Brexit

Brexit was an international event for the European Union (EU), where United Kingdom (UK) left the EU. The entire event lasted from 23 June 2016 to 31 January 2020. Figure 2 shows EUR against USD throughout the period of Brexit.

Figure 2: EUR/USD Spot Rate 25 February 2015 to 24 February 2020 (XE, 2020)

The EUR showed signs of depreciation against the USD when majority of the public voted UK to withdraw from the EU. However, the value of EUR appreciated when then Prime Minister of UK, Theresa May, announced that UK will still be part of the EU for two years. When UK agreed with the EU on the ‘divorced bill’ on 8 December 2017, the EUR can be seen having a depreciation trend against the USD. Moreover, the EUR continued to depreciate when UK officially left the EU on 31 January 2020 (Power, 2019). Brexit is one factor causing economic instability resulting in a decreasing economic growth of the EU as shown in Figure 3.

Figure 3: Economic Growth of the EU (Europa, 2020)

With a decrease in economic growth, a dealer will prefer to opt for a short position, which will result in an increase in supply of the EUR. This causes the exchange rate to decrease explained in Figure 4.

Figure 4: S-D Model on Brexit effect on EUR

EU-US Trade Relations

In 2018, the EU is the largest exporter and second largest importer of US. From 2008 to 2018, the EU is seen having an increasing trend in trade surplus with US as shown in Figure 5. This means that the EU is exporting more products to US compared to their import.

Figure 5: EU-US Trade 2008-2018 (Europa, 2019)

There has been a trade tension between US and EU in recent years. This has been largely influenced by President of USA, Donald Trump, threatening to impose tariffs on multiple products from EU. One example is imposing 25% tariff on vehicles (Pramuk, 2020). However, negotiations between the two countries are still on-going to work out on a deal which will improve trading relationships. This will affect exports of the EU as vehicles are the second highest exports of EU to US in 2018 (Workman, 2019). With tariffs in place, manufacturers and companies will increase the price of the products. This means consumers will have to pay a higher price for the imported products, causing exports of EU to fall. With higher imports, there will be an increase in supply. This leads to the exchange rate to decrease, explained in Figure 6.

Figure 6: S-D Model on EU-US Trade affecting EUR

Monetary Policies

The interest rate of EU is determined by the ECB while the Federal Reserve Board determines the interest rate of US. Due to the Coronavirus affecting global economies, numerous Central Banks have lowered their interest rate. Statistics on 4 March 2020 showed the interest rate of US has decreased from 1.75% to 1.25%. The ECB maintained at 0% but deposit rates were reduced to -0.5% (Lee, 2020).

With the ECB having a negative deposit rate, it discourages deposit made to the ECB. This results in the ECB having lesser EUR. A decrease in supply leads to EUR appreciating against USD as shown in Figure 7.

Figure 7: S-D Model on Monetary Policies affecting EUR

2.4.2 Future Market Conditions for EUR/USD

In my opinion, the spot rate of EUR/USD will fluctuate in the next 6 months. With measures from the ECB, the early stages of the next 6 months will see the EUR generally appreciating against USD. However, the poor economic growth will see the EUR start depreciating against USD, but the spot rate will not hit a record low. This is because the exports of EU can still contribute to the economic growth and trade relationships between EU and US can be further improved on.

References

EUR/USD (Point form)