3.

2 Analysis and market view (forecast)

3.2.1 Inflation rate (CPI consumer price index)

 United States

Figure 1: The inflation rate in The US from 2014 to 2020

The inflation rate in The US has experienced a dramatic fall since the last highest rate (2.443%) as
the Covid-19 has caused an unconventional recession, leading to decreased buying power.

Figure 2: The inflation forecast rate of The US from Q3 2021 to Q1 2022 (OECD DATA 2021)

OECD Data (2021) expects that the inflation rate will decline sharply compared to the current
inflation of 4.8% in Q2 (OECD, 2021), reaching 3.722% in Q4 2021 after steady climbing as a
result of reopening in June.
  Euro area

Figure 3: The inflation rate in Euro area from 2014 to 2020

Over the last 7 years, the Euro area inflation rate witnessed a wild fluctuation from 0.03% to 1.7%
and the Covid-19 has caused the inflation to drop significantly in 2020 (World data, 2020).

Figure 4: The inflation forecast rate of Euro area from Q3 2021 to Q1 2022 (OECD DATA
2021)

The inflation rate is expected to increase sharply from the current rate 1.8% in Q2 to 2.275% at
the end of 2021 (OECD-Data, 2021) as the reopening of economic growth despite the concerns of
spreading Delta-variant of the coronavirus (Guarascio-F, 2021).

® As the higher the inflation is, the lower the exchange change, meaning the inflation has a
dramatic negative effect on FX rate (Investopedia, 2021). The inflation in Euro area is
lower than that of the US, indicating that US goods increase in price quicker than Eurozone
 goods and the US’s exports will become less competitive and less demand for USD. This
will shift the demand of USD to the left due to the higher price while the supply of USD
will increase since US consumers find it more attractive to buy Euros and its import.
Therefore, it will lead to lower value of the USD against the EUR, in other words, it will
cause the EUR to appreciate against the USD.

3.2.2 Interest rate

Country Actual Q3 2021 Q4 2021

United States 0.25% 0.25% 0.25%
Euro area 0.00% 0.00% 0.00%
Table 1: The forecast of interest rate in two areas from the present to Q4 2021 (Trading
Economics, 2021)

According to CNBC (2021), the Federal Reserve decided to maintain its key interest rates near
zero as it believed the economy has not reached the substantial further progress yet despite it
continues to strengthen. In contrast, as European Central Bank reports, the interest rate will remain
unchanged until the inflation outlook has been seen to be close, but below 2% even as the
eurozone economy is improving rapidly. By comparison with the US’s rate, the Eurozone’s rate is
lower, indicating that lenders are provided with higher rates, leading to attract more foreign capital
(Twin-A, 2021). The inflation rate of the US is much higher than Eurozone, however, leads to the
US’s real interest rate is lower than Euro area. Thus, it discourages capital inflow, increasing the
supply of the USD while encouraging the capital outflow and decreasing the demand of the USD.
Thus, it causes the EUR to appreciate against the USD.

3.2.3 Economic growth expectation

Country Actual Q3 2021 Q4 2021

United States 6.5% 5.1% 4%
Euro area 2% 3.2% 1.4%
Table 2: The forecast of economic growth in two countries from present to Q4 2021
(Trading Economics, 2021)

According to The New York Times (2021), in the second quarter, the US’s GDP surpassed pre-
Covid growth by rising 6.5% while in Euro area, the GDP increased by 2% based on the latest
report of Eurostat (2021). The US’s GDP is expected to decline to 4% compared to that 1.4% in
Euro area in Q4 (Trading Economics, 2021). However, US growth is seen expanding 7% this year,
while Eurozone’s GDP is expected to reach 4%. Hence, Eurozone is on the track for a slower
economic recovery than the US, leading to the increase demand of the USD and increase supply of
the EUR or the EUR will depreciate relative to the USD.

3.2.4 Exchange rate expectation

The expectations of early tapering by the Fed will begin sooner than expect as seeing U.S Treasury
yields inclined to three-week highs coming with an obvious rally for the USD and the
unemployment rate fell to 5.4% in July (Lee G, 2021). At the same time, the ECB is seen
remaining its low-level interest rates and expressed its concerns about the new breakout of
coronavirus. Thus, there will be strong demand for the Dollars or it will appreciate against the
EUR as investors turned to the dollars despite the lower negative real interest rate.

Conclusion: by analyzing three factors above, the USD may appreciate against the EUR in the
next 3-6 months. The figure below is EUR/USD expected by Trading Economics (2021),
indicating that the rate EUR/USD is estimated to decline, or USD/EUR will increase in the future.

Figure 5: The forecast of the EUR/USD in the next 12 months