EUR/USD Forex Analysis: Economic Factors Influencing Trends

This report provides a comprehensive analysis of the EUR/USD currency pair, examining historical data from April 2018 to March 2019 and identifying key economic factors influencing its fluctuations. The analysis considers relative inflation rates, commodity prices, interest rates, speculation, government interventions, economic conditions, and geopolitical factors. It highlights the impact of events such as US Fed rate hikes, ECB stimulus phasing, US-China trade war, Brexit, and IMF growth forecast revisions. The report forecasts a bearish outlook for the EUR/USD pair over the next 3 to 6 months, supported by low Euro area GDP growth, global uncertainties, and ECB macroeconomic projections indicating reduced growth and inflation forecasts. It also cites expert opinions and retail trader data to reinforce the bearish perspective.

FOREX Analysis (Stage 1 - individual part) - EUR/USD
Student Name
University Name

EUR/USD
1. EUR/USD Historical Data:
Figure 1: Exchange rate chart of EUR/USD data from April 2018 to March 2019 (Thomson
Reuters Eikon)
The EUR/USD declined in April-May 2018 due to hike in the US Fed rates in March and
increase in geo-political issues. The pair had hit high of 1.255 in February, afterwards it was
range bound for few months and then it started to decline in later half of April. In May 2018,
Euro declined further because of the expectations that the ECB will phase out the stimulus
provided by its massive three-year bond-buying program and uncertain political scenario in
Italy and Spain.
Figure 2: 1-year price history of EUR/USD (Thomson Reuters Eikon)

In August 2018, the EUR/USD remained volatile as it was negatively influenced by the on-
going U.S-China trade war and No-Brexit deal scenario. It declined to 1.14 as US President
confirmed the possibility of increased tariffs on Europe. Further, the slowing Turkish
economy negatively impacted Eurozone that took the pair below 1.13. Next month,
EUR/USD started strengthening as USD felt pressure because of the rise in US Treasury
yields and the pair moved above 1.16. In October 2018 the EUR/USD declined to 1.13 as
Equity markets took a dovish tone across globe which increased the demand for USD.
In January 2019 there was some pressure on EUR/USD as UK parliament voted down PM
May’s Brexit deal and as IMF reduced the growth forecast for 2019. In February the
EUR/USD pair remained dovish dominated once again US-China trade talks and Brexit
proceedings. For the last few months the pair traded in a broad range of 1.1212 to 1.1567.
The pair opened at 1.13 on 15th March 2019.
2. Economic Factors Influencing EUR/USD
The main determinant of exchange rate for any currency is its supply and demand, which
depends upon: Relative inflation rates, Commodity prices, Relative interest rates,
Speculation, Government interventions, Economic conditions, Geopolitical factors.
The primary factor that affects EUR/USD is the relative strength of two economies which can
be gauged from the macro data. ECB and US Fed are most important institutions that
influence this currency pair as the Central Banks regulate the monetary policy and interest
rates that directly affect the currency as a result.
Then there are geopolitical issues that influence EUR/USD rate. US and Euro being the top
economies of the world are strongly impacted by the worldwide political and economic
events. The issue is that the US dollar has a safe haven status so when there are
uncertainties globally its demand increases and negatively affecting the EUR/USD rate. Euro
being the common currency of the 18 countries is more susceptible to the particular issues
of that region.
The other important factor for this currency pair is relative interest rates. The exchange rates
are correlated with the interest rates so when European Union interest rates are higher than
that in US; the Euro strengthens against the US dollar and vice versa.
3. Forecast on Current and Future Market Conditions

According to Reuters News the real GDP of Euro area increased just by 0.2 per cent in the
fourth quarter of 2018. Low growth rate is proving to be a negative for EUR/USD rate. Also
the on-going global uncertainties regarding the US-China trade talks and Brexit scenarios
are affecting the currency pair. For next 3 to 6 months the outlook for EUR/USD is bearish.
This bearish outlook is further supported by Gross domestic product outlook and Inflation
outlook by the ECB staff macroeconomic projections March 2019. The 2019 annual
projections for real GDP and inflation is 1.1% and 1.2% respectively, this has been revised
down substantially compared with the December 2018 projections. So, ECB is unlikely to
raise rates for the coming times. This dovish scenario is expected to weigh down Euro
exchange rates.
This view on the economy is also confirmed by Mike Amey, portfolio director and head of
ESG at PIMCO in an interview with Bloomberg News. He told that “The European data has
slowed down, but crucially and the one we have generally focused on, for a long time- has
been the inability of Europe to get inflation up towards the target sustainably,”. According to
FXstreet.com, the retail trader data also indicates that investors are adding bets to position
for further weakness in Euro.
Figure 3: Forecasted EUR/USD rate for 2019 by LongForecast
The LongForecast projections (Refer to Figure 3) also support this bearish outlook which
projects that EUR/USD will be weakening throughout 2019. Therefore, based on the
fundamental factors that have been evaluated a bearish outlook is most suitable for
EUR/USD rates for next 3 to 6 months.