Financial Market- JPY/USD Analysis

Introduction

Over the past year The EUR/USD currency exchange rate has been experiencing a downward trend in favor of USD being stronger compared with EUR. As of the first quarter of 2018 there was a sudden drop in the exchange rate between EUR/USD and henceforth till today there has been showing a gradual decreasing trend in the chart which can be shown in Fig.1. The major factors affecting these fluctuation in exchange rate will be inflation between the countries, their interest rates, and level of national debt. By comparing the factors between these 2 countries we will be able to forecast what the exchange rate be over the next 6 months

Figure 1 EUR/USD Exchange rates, (Eikon 2019)

1. Inflation rate

By comparing the inflation rate between the Eurozone and US we can show that the exchange rate follow the rules that with higher the inflation rate, it will lead to an eventual decline in exchange rate for that respective currency. For the span of 1 year from July 2018 to July 2019 there was there has been a downward trend on EUR/USD of 1.1742 to 1.1074 which was decrease of 668 pips which can be shown from Fig 1. This is highly influenced by the rate of inflation between the 2 zone of interest which can be then shown in Fig 2. By forecasting the inflation rate we can then forecast the EUR/USD exchange rate. Forecast wise, inflation in the United States is expected to raise by 1.70% by the end of this year quarter and the inflation rate of for Euro area will be at 1.20% (Trading Economy, 2019).This statement is also backed up by a news report by New Europe stating that from a 1.7% inflation rate will lead to the inflation to become 1.2% by the end of the quarter (New Europe, 2019). Hence US having a higher inflation rate will result in a weaker exchange rate this shows that by using just inflation there will be an increase in the EUR/USD exchange rate.

Figure 2 United States & Euro area Inflation Rate (Trading economics 2019)

2. Commodities

By having a higher commodity price it will lead to a raise in the exchange rate of that country due to an increase in export revenue (Emanuel, Fernando, & Andreas, 2016).

The ongoing trade war between US and China is yet to stop and China is even introducing 2 new tariff on American exports that will hit about $75 million worth of agriculture products, cars and automotive products and oil exported from the U.S. These auto tariff could be as high as 25% but mostly will be around the range of 5% to 10% (Andrew, 2019). Due to the increase in the tariff due to my prediction it will lead to a decrease in the export in US goods out of the country, hence leading to a decline in USD currency rate.

On Euro area side of the story, there has been a setback due to the fact that the White House agreed to delay new tariffs on imported automobiles and parts for six months as of May of 2019 (Bryce B. 2019). Hence before such tariffs are imposed over the next 6 months I speculate that there will be an increase in the export before the tariff by US is imposed. As such EUR will have a rise in their exchange rate. Below the graph will show an example of the forecast of Euro area and U.S.

Figure 3. United States Exports Forecast (Trading economics 2019)

Figure 4. European area Exports Forecast (Trading economics 2019)

Conclusion

After conducting all these research it is safe to say that by the end of 6 months which is on March 2020 there will be an increase in the strength of the US dollar and a decrease in the strength of the Euro at the rate in which both country inflation is going.

Whereas we are able to capitalize and forecast that from September to November the Euro currency will appreciate in value due to its export increase of automobile before the tariff hits. So in summary my forecast will be to that from September to November there will be an increase in Euro currency on this period and eventually by the end of the 180 days period starting from early September, US will eventually catch up on its currency value which will then cause the rates of EUR/USD to be lower.

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