December 2015

 

Technical Analysis

December was a month marked by high volatility. Starting on the 2nd of December, the MACD went over the signal line by 6%, which is a strong bullish signal. In fact, the market went up 4%, from 1.0549 to 1.0938, on the same day.
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After this huge increase, the quotation point reached the maximum on the 15th of December (1.10580), finding an important resistance line on 1.1043. Besides this line, there were also other important resistance lines, such as 1.0987, 1.0944 and 1.1041. The lines of support for December remained at 1.0802, 1.0871 and 1.0902. In the future, we predict that the EUR/USD will find an important support at 1.0829, as well as an important resistance at 1.0992. [/read]

 
 

Fundamental Analysis

In December, the EUR/USD inverted the downtrend and climbed from 1.0626 to 1.086. With the Eurozone unemployment rate coming out better than predicted, as well as the PPI and the German ZEW Economic Sentiment, the Euro strengthen.
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In the US the economic indicators came out worse than expected - the manufacturing PMI, the non-manufacturing PMI, the trade balance and the JOLTS Job Openings led the EUR/USD to 1.1015 (highest value of the month). On the 16th the FOMC voted on the target interest rate and it agreed, unanimously, to raise the target range from 0%-0.25% to 0.25%-0.50%. This was the first increase of the rate since June 2006. This rate hike was not a surprise, as it was already predicted to happen since the beginning of the year, but awaited to happen only at the end of 2015 (Yellen's statement in May). Since the change of the FED interest rate was already predicted, it didn’t plunged the pair immediately, but dragged it from 1.0874 to 1.086 in 14 days.[/read]

 
 

FED Rate Hike

On 16th December the Federal Open Market Committee (FOMC) unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent.
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After seven years of the most accommodative monetary policy in U.S. history, one of the most important and riskiest decision has taken since Yellen became chairwoman in early 2014. The biggest risk is that higher interest rates do not bite in predictable ways. Not only do they take time to pass through the real economy, but there is also a difficult-to-foresee threshold at which the impact can suddenly shift from mild to severe.

The Fed’s task this time is even more complicated because other central banks are leaning in the opposite direction. The combination of lower rates abroad and rising ones at home is making the United States dollar surge against other currencies. While that might be good for American tourists heading overseas, it hurts American manufacturers seeking export markets and makes imported goods more competitive, undermining the country’s trade balance.

The decision marks the first increase since the FED pushed the key rate to 5.25 percent on June 29, 2006. In a succession of moves necessitated by the financial crisis and the Great Recession that officially ended in mid-2009, the FOMC took the rate to zero exactly seven years ago, on Dec. 16, 2008.

“Americans should realize that the Fed’s decision today reflects our confidence in the U.S. economy,” Yellen said. “While things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement.”

The Fed had been holding the funds rate near zero despite a steady but unspectacular pattern of growth once the recession ended.

"Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic conditions, the committee decided to raise the target range for the federal funds rate to ¼ to ½ percent," the FOMC's post-meeting statement said. "The stance of monetary policy remains accommodative after this increase, thereby supporting further improvements in labour market conditions and a return to 2 percent inflation."

Unemployment, which is one part of the Fed's dual mandate, has fallen to 5 percent. Inflation, the other part, has been less robust, registering just 1.3 percent growth most recently.

Despite feeling it was time to hike rates, the quarterly summary of economic projections showed Fed officials had not grown substantially more optimistic about economic growth. Forecasts for gross domestic product growth were essentially unchanged since the September meeting, with a modest improvement expected in 2016 from an initially projected 2.3 percent to 2.4 percent.

Expectations for inflation actually edged lower, with the core personal consumption expenditures index projected to 1.6 percent growth in 2016, down one-tenth from the September forecast.

The rise in U.S. rates will have an impact on the global economy, but many emerging markets have particularly good reason to be worried.

Their governments and companies borrowed heavily in dollars over the last decade, because rates were so low. And investors were happy to pour money into places like Turkey, Malaysia and Latin America in the hope of getting a better return. That flow has reversed in anticipation of a Fed rate hike -- about one trillion dollars was withdrawn from emerging markets between July 2014 and August 2015. Here are some countries most at risk: (Source: CNN Money)

Brazil, that is in a deep economic crisis. Its currency -- the real -- has lost 31% against the dollar so far this year, and inflation is at a 12-year high.

 Turkey, which saw a huge influx of foreign investment and its economy grew 9% in 2010 and 2011. But this year, the economy is expected to grow by just 3%.

 South Africa, which is another country that is paying the price for borrowing heavily in dollars when they were cheap.

 China is also likely to feel an impact, especially since the government has started to allow the Yuan to trade more freely. But unlike most emerging markets, China's size, huge exports and foreign exchange reserves give it protection against possible shocks.

 And other emerging markets like Russia, Venezuela and Nigeria also depend on commodities exports for big chunks of their government revenues. Because commodities are traded in dollars, their prices could drop even further if the dollar strengthens.

There are concerns that a rise will compound that slowdown, as higher rates in the US could strengthen the dollar, the currency in which many countries and companies borrow. It puts US policy at odds with that in Europe, where even easier borrowing terms are being implemented. (Source: BBC) Still, the recovery has been disappointing for many. Household incomes remain lower than they were a decade ago when adjusted for inflation, and wages have climbed only sluggishly even as firms hired back workers. Hourly earnings have risen by about an average 2.2 percent annual pace over the past seven years, compared with 3.3 percent in the 20 years through 2008. (Source: Bloomberg)

Beyond the psychological signal, the Fed's decision changes what banks charge each other for overnight loans. Because banks and other lenders use the Fed benchmark to determine the rate on loans from mortgages to credit cards, consumers will see a difference, albeit a small one. After years of making little return on loans, banks are expected to raise rates on loans more rapidly than on deposits. Homeowners with fixed-rate mortgages won't see any change in their monthly payments, but a borrower with an adjustable-rate mortgage is likely to see an increase at the next adjustment Shortly after the Fed's rate decision, major banks including Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and U.S. Bancorp (USB) announced hikes in their prime lending rate, from 3.25 percent to 3.50 percent. (Source: CBSNews)

Financial markets took the news calmly. The Standard & Poor’s 500-stock index rose 1. 5 percent to close at 2,073.07. The yield on two-year Treasuries, closely tied to short-term interest rates, closed above 1 percent for the first time since April 2010. (Source: NYTimes)

The Fed statement and its promise of a gradual path represented a compromise between policymakers who have been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth. Yellen will now face the challenge of maintaining an internal consensus over the pace of rate increases amid considerable economic uncertainty and the political pressures of a presidential election year.[/read]