Looking at the chart, we can see that the percentage change greater than 0.5%/day of the pair EURUSD comes more and more, but mainly on bearish candles. This showed that the downward trend last week was quite clear. However, it’s time to remember the saying: “Be greedy when others are fearful and be fearful when others are greedy”.
Below are two main reasons for the appreciation of EURUSD.
Brexit is hard to occur
We all know that the British economy only stays after Germany’s in the European Union (EU). The campaign “Vote Leave”, which is held to urge citizens to vote for Britain to leave the EU, is making financial markets more complicated. However, looking at more than 1.3 million Britons immigrating to the countries of the alliance, or more than 3 million citizens working in the UK, the labor force structure of this country is more complex than ever before. When Brexit happens, panic is unavoidable. It will have direct effects on the Britons, making those holding the voting papers become anxious. Moreover, the amount of money from EU countries invested in England is more than 708 billion USD each year, accounting for more than a half of the country’s investment flow. 45% of British exports and 53% of imports are from the EU also.
Of course, Britain plays an important role in the EU as the union’s budget is mostly from countries like Britain and Germany. In our opinion, Brexit is being exaggerated due to the effects of excessive media campaign “Vote Leave”. For this reason, the curb of investment into the Europe is just temporary. Long-term investors will choose the time of low prices to buy asset, which is understandable. And now, thanks to this effect, EURUSD has lost 3% from the highest level of the month on May 3, 2016.
A rate hike in June seems impossible
After increasing the basic rate from 0% => 0.25% on December 16, 2015, Fed has sent the message about the stabilization of the world as well as the US economy. However, how has the global economy changed after 2 fiscal quarters passed? In China, a series of negative economic reports were released such as declined manufacturing, business and investment growth in comparison with the same time of 2015, which were all below market expectations. The US dollar index has dropped 3.15% after the Fed rate increase (even reach 6.75% sometimes). Fed Chairman Yellen, who is well-known for her cautiousness, is said to have a dovish stance (You can read the research “Fed: Dovish or Hawkish?). She will make further judges on economic data, as well as use her dovish tone to support the monetary easing. With such a kind of thinking, the decision of raising interest rate at this moment is not suitable.
Moreover, Australia and Japan have recently lowered their interest rates to combat the possibility that Fed will raise the basic rate, making the greenback to go up against other currencies. This contributed to lower the price advantages of many US sectors, as well as raised the bankruptcy possibility of US companies and increased the unemployment rate. If Fed raise the interest rate at this time, the difference in the exchange rate will be expanded further. For this reason, according to PFM Team’s point of view, it is hard for a rate hike in June to be implemented (especially when there have not been final results for the Brexit issue).
At the moment, EURUSD is hovering at a relatively low area in comparison with its price at the beginning of the month. For value investors (who are different from trend investors), buying positions are totally reasonable at this moment.