May 2015


Technical Analysis

On May 18th the EUR/USD inversed its upward trend, initiated in March, after reaching 1.1465. The return to its long-term descendent trend was reinforced first, on May 18th, when the Japanese Candlestick intercepted the 50 SMA and went below the support at 1.1210 (now a resistance), and second, on May 22nd, when the Japanese Candlestick went below the 100 SMA. 
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On May 27th, EUR/USD found great resistance at 1.0850, after having initiated a short-term upward movement. Currently this rate may be restrained by the 100 SMA, the 50 SMA and the resistances at 1.1210 and 1.1290, but if EUR/USD overcomes this strong resistance zone, we may see a more ample correction to 1.1400, or even 1.1460/1.1560. Should it break the support at 1.0850, EUR/USD has its next supports at 1.0750, 1.0520 and 1.0460.




Fundamental Analysis

In May, the EUR/USD returned to its downward trend, after starting the month at 1.1201 and closing at 1.0909. On the 12th of May, Greece paid the IMF €753M back, followed by an appreciation of the EUR/USD from 1.1220 to 1.1402 within 2 days (highest quote in 4 months).
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However, the Euro started to dip following the results of the German ZEW Economic Sentiment whose outcome was worse than predicted, while the US Core CPI’s outperformed expectations. June is highlighted by the repayment of the €1544m IMF loan by Greece, which may lead to Greece’s default or some drastic political measures. Since the US interest rates will not rise in June, investors fear that this will only happen in 2016. However Yellen implied in her last statement, that the FED intends to increase rates this year. On June 5th, OPEC will meet to discuss energy markets along with the production level of oil. If they decide to change production levels, this will have a significant impact on oil prices, which is likely to affect all major currencies.





Throughout the campaign for the UK election on May 7th, the Labour and Conservative party were neck to neck, in an environment of a declining economic growth, and hostility amongst its population against immigrants.
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The PwC UK economic outlook from March 2015 suggests that the slowing economy is affected by the problems the EU is facing. Prior to the election an estimated GDP growth of only 0.3% in the first three month of 2016 was published. This estimate was revised at the end of May however, disappointing again, the revised GDP growth remained unchanged. This is important to put into context, because before the last quarter, the UK had been boosting European recovery. The current geopolitical talks on Greek’s debt payments add to EU uncertainties and a low interest rate environment, pressures the Bank of England to maintain inflation close to zero. The second main pillar of debates is Immigration. Immigration is regarded to be the most divisive issue in the UK by 19% of the population (The Guardian). The country exceeds those leaving by more than 100,000 in every year since 1998. This has caused parties such as UKIP to assert, that immigrants are hogging an unfair proportion of housing, school-places and health services. The immigration problem and the string “imposed” by the EU are the main arguments of those who favor an exit from the EU.


In contradiction to Yougov’s estimation on May 6th, that predicted a tied game between Conservatives and Labour parties (34% each), were the final results clear. The Conservatives achieved a full majority of 331 seats out of 650, representing a gain of 28 seats. Therefore Anti-European party (UKIP) was no longer needed to achieve a majority and form a coalition. Even though, they made headlines due to a growing popular support during the campaign, 12,9% of votes only secured a single seat.


Since the Labour Party is considered to be held responsible for the UK’s recession between 2004 and 2010, the party tried to build an “economically responsible” image by pursuing, in a smoother and more social way, the austerity cure to reduce public deficit than the Conservative party. Meanwhile, the Conservatives were aiming to continue politics from the first mandate of David Cameron: sustaining a substantial growth of 3% in 2014 that led to a significant decrease in the unemployment – by nearly 25% since 2010 – and reducing public deficit (at 5,8% of the country’s GDP, Eurozone’s ø at 3,2%), reaching a surplus by 2020. Daily Express published in January a survey, which showed that 80% of 14,581 voters would like the UK to leave the EU. Cameron had promised already in January 2013 to hold an in/out referendum vote on Britain’s EU membership at the end of 2017, should his party win an outright majority. Further, he promised a decrease in taxes and stronger laws on illegal immigration. Underneath the immigration topic, a strategy to win UKIP´s and other hesitating voters was put in place, considering the dispersion of the votes due to similar political views. Despite his promise, Cameron will first try to renegotiate the terms of Britain’s relationship with the EU, to avoid the possible Brexit.



By being a member of the EU, the UK belongs to the world´s largest single market with a total GDP of around 11 Trillion pounds. This provides UK several benefits, mainly to their businesses: £227Bn worth of exports to EU in 2014, enabling them not just to operate in a free trade market, reducing costs and prices for customers, but also taking advantage of a common set of rules so that businesses don´t comply with 27 different sets of regulations (Financial Times). Even though Britain is an EU member state, they have elected not to use the Euro currency. They didn´t want to waive control of its own interest rate policy, and being forced to meet the “Euro convergence criteria” by limiting their fiscal policy and adjusting their current level of exchange rate. Also, when the Euro was first proposed as a single currency system for the EU, the Prime Minister of UK, Tony Blair, declared that there were “five economic tests” that must be met for his country to accept the Euro. However they were never accomplished, and that, for some they will never be.


From the EU perspective, the possibility of a Brexit, or even the chance of renegotiations on their treaty may result on political and financial instability, as well as on an increase on the power of nationalist parties in other EU state members, laying the EU to high risk of disintegration. A possible Brexit would reflect the value of the Euro currency, slow down the GDP of the Euro Zone, and also build constraints in the overseas trade balance.


The consequences of a Brexit are hard to measure to the UK, but those in favor of leaving argue passionately that it would liberate Britain from the constraints of the EU, and free up the country’s businesses to trade more successfully with the rest of the world. On the other hand, those against the Brexit argue that it would jeopardize Britain’s trade with its major commercial partner, the EU, and make the country less attractive for foreign investment. After all, many companies come to Britain in part because of its access to EU markets. Other EU-companies may disinvest in the UK, given limitations on the free-float of human capital and cash. In fact, the consequences of the potential Brexit much would depend on how Britain’s relations with the EU would remain after the exit. UK could find an agreement similar to the one between Switzerland and the EU. Switzerland has an association with the EU, while Norway and Iceland are in the European Economic Area, but with the authority to change the legislation of the market. The negotiation of some kind of partnership between the EU and the UK should benefit both. However, what is known and clear, is that any referendum or delay in renegotiations will invite a period of high uncertainty and volatility on both economies, and consequently, on exchange rates.


The PWC report on the UK economy provides a more detailed review of the state of the UK economy. Besides a very informative and recent briefing paper by the House of Commons on the facts of the UK-EU Economic relations, the Guardian gives an outlined overview of the reasons, consequences and constraints of the Brexit.