December 2014

 

Technical Analysis

Following November, the EUR/USD has presented a trendless evolution, between 1.2244 and 1.2570, consolidating this way after a major drop. A monthly high was achieved on the 16th of December.
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Since then, the pair returned to its downward trend. A breakout of the upward trend line, along with a crossing of the 50 MA, reinforced a bullish USD. The support previously established at 1.2244 was breached, as the EUR/USD dipped to 1.2168. This level worked as a short term support, further turning into a resistance as the USD continued its journey up. For now, 1.2094 is being tested and if it is not crossed, the level of 1.2168 may be tested again as a resistance. On the other hand, 1.20 and 1.18 are just around the corner.

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Fundamental Analysis

The EUR/USD remained bearish in December, trading at 1.2244, as German PPI showed up a bit better than expected, along with GfK consumer climate. The dollar fosters again against the euro, as the Federal Reserve announced that interest rates are to be kept low for now, revealing some patience concerning the stance of monetary policy.
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Fed’s announcement did not accelerate the timing to increase interest rates, which is expected to happen in mid-2015. Regarding Europe, inflation has been declining sharply since the end of 2011. At the moment, 12-month inflation is well below the ECB’s stability target of 2 percent as some countries are experiencing deflation. ECB is thus preparing quantitative easing, by performing bond purchases, overriding German-led concerns. 

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SPOTLIGHT: Oil Prices Plunge

Oil prices have hit a five-year low this month. However, analysts say that the price of WTI Crude Oil should increase soon again.This is the result of an increased supply of oil mainly due to enlarged fracking activities in the US. Some call the U.S. the new Energy-Super Power.
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One of the major competitors to the Americans is Saudi Arabia, which in contrast to the other countries, does not currently face difficulties caused by the low oil price. Reasons why they do not ask for a restricted supply could be the high oil reserves and the chance of a “wait-and-see” approach. Some claim, Saudi Arabia is waiting until producers with high production cost are eliminated from the market by low market prices. When high-cost production competitors are forced out of the market, the supply will decrease and prices should go back up again. The Economist sees this transformation already happening. Other articles suggest, that low prices in oil might maintain for a while. However, the low price environment decreases the investments in oil generating assets. This puts upward pressure on the oil price, as supply should decrease. On the other hand the price reflects expectation of high supply of oil in 2015.Fracking is criticized due to its (possible) harm to the environment and is by now still prohibited in some countries.This gives not only a comparative but also an absolute advantage to U.S. oil producers compared to international competitors. Although prohibited in other countries, the fracking method is generally possible in Canada, China and Europe. However, The Economist sees the advantage precisely in the combination of the oil business experience of Americans, “eager investors” and “pliable bureaucrats”. Furthermore fracking is rather cheap to other drilling method. The existence of fields is certain and the setup of a well much less expensive.The low oil price is benefiting many countries importing oil,whereas oil exporters are suffering. The Eurozone is one of the countries benefiting and the low price can be seen as an injection to the slowed-down economy. Especially heating costs and fuel decrease and consumers are benefiting from a lower cost environment next to many industries. Former major suppliers such as Saudi-Arabia and Russia are now behind the U.S.. Especially Russia, Iran and Venezuela are dependent on a high oil price as it forms their trade balance. The decrease in price can lead to a deficit in these countries. These declining revenues can have massive effects on the welfare of an economy. For example, Bloomberg News reported Angola may cut the funding to prevent HIV due to the decline in revenue given by the decrease in oil price. Read the OPEC December Monthly Oil Market Report here.
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