FX Monthly Report

May 2017

EUR/USD 1M EUR/USD 1Y

1.1500 1.1600
1.1400
1.1300
1.1200
1.1100 1.1000
1.0800
1.0900 1.0600
1.0400
1.0700
1.0200
1.0500 1.0000
1 - May 8 - May 15 - May 22 - May 29 - May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

MARKET ANALYSIS

Fundamental Analysis Calendar

May was marked by an uptrend in EUR/USD. The month start at 1.0910 and 2nd June - Unemployment Rate
after a slight up-movement in the first days of the month, the pair reverse its
8th June - Minimum Bid Rate; ECB Press Conference; UK
trend with Emanuel Macron victory in the French Presidential Elections. Adding
to the US employment situation (4,4%) the pair reached a low at 1.0839 on 11th Parliamentary Elections
of May. The USD started its depreciation forced by a series of discouraging
14th June - CPI m/m; FOMC Economic Projections; FOMC
news that emerge in the USA regarding President Trump mishandling classified
information, leaks to the press from within the FBI and suspicion of obstruction Statement; Federal Funds Rate; FOMC Press Conference
of justice by the President, undermine the confidence in the stability of the 15th June - Eurogroup Meetings
White House leading the pair to a high of 1.1263 on 22nd May. This trend was
reversed after the release of FOMCs minutes on 24th, leading the pair to a low 16th June - ECOFIN Meetings
of 1.1168 on that day. On 26th, US preliminary GDP q/q data was released 21nd June - Crude Oil Inventories
beating expectations with an annualized change in the inflation-adjusted value of
1.2% instead of the expected 0.9%, which caused a following appreciation of the 26th June - German Ifo Business Climate
USD until 1.1162. On the 30th, the CB Consumer Confidence Index release 27th June - CB Consumer Confidence
revealed the worst value since February, triggering USD to depreciate in the
29th June - Final GDP q/q
last days of the month, closing the month at 1.1246.

Technical Analysis
May kicked off with a slow but steady rise on the pair, with a local maximum being attained on the 7th of May at 1.1021. Nevertheless, this
movement was followed by a sharp decrease, whose value finally reached a month low of 1.0855 on the 12th at midnight. Mays highlight was
decisive in this period, where the EUR/USD pair rose from the already mentioned minimum to 1.1268 on the 23rd, a variation of 3.8% in roughly
10 days. This upwards trend was succeeded by a stabilization until the end of the month. On the 31st, the exchange rate value revolved around
1.1250, with no defined trend. Concerning volatility (as measured by the Bollinger Bands), the first half had relatively low peaks, with the bands
width going from 0.5 to 1.5 (equivalent to 4 standard deviations towards a 20-day moving average). From the 15th onwards, volatility rose
exponentially, with the width reaching a value of 3.85046 on the 19th, equivalent to a standard deviation of 0.96 towards the moving average.
Later on, the width returned to a stabilized pattern, indicating values around 1.25 until the end of the month.

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 Election to the Presidency of France

On the 7th of May, the second round of the French election gave the victory to the new member of French politics, Emmanuel Macron. The first
round of the 2017 French presidential election was on 23rd of April and, as no candidate won, a run-off was held between the top two candidates,
Emmanuel Macron of En Marche! and Marine Le Pen of the National Front. The thirty-nine years banker, a former economic minister, will have the
hard task to fight terrorism and trying to respond to the needs of the French people like employment and social welfare.

The election to the Presidency of the Fifth Republic of France (1958 - today) presented
several candidates. However, those with the highest intention of the vote were five and
they cover the entire political spectrum. During the campaign, the candidates had the
opportunity to present their positions, both in national affairs and in relation to the
future of France's relationship with Europe. Candidates of the 2017 French Presidencial Election. Source: BBC
From the extreme left, we had Jean-Luc Mlenchon, the founder of left movement La France Insoumise. Mlenchon wanted to raise the minimum
wage, lowering the retirement age from 62 to 60 years old and make the working week from the 35 hours to 32 hours. He also desired to limit the
higher salaries in companies and a referendum to begin the process of writing a new constitution. For Europe, this candidate demanded the
renegotiation of the EU treaties and help refugees in France with a creation of a new agency to deal with their potential problems.
On the moderate left, we had, from the Socialist Party, Benoit Hamon. He is known for the stance against the pro-market position that dominated
the Hollande government. He proposed a universal basic income, the creation of a tax on robots and an increase in tax on banks. To the European
policies, he intended to create a euro zone assembly that would have powers to control decisions made by the heads of the European governments.
In the centre, without any party supporting him, we had Emmanuel Macron that came to politics very recently, creating his own civil movement
called En Marche!, which intends to renew the French politics. He is considered an economic liberal but left-wing on social issues. Macron intended
to see through a reform of the labour market, with the objective of creating a more flexible market. He is a known pro-European, desiring a new
reform to EU by creating a Eurozone budget, parliament, economy minister and finance minister.
From the conservative right, the Republicans presented Franois Fillon, considered a socially conservative, but a very pro-market and pro-business.
Fillon wanted to reduce public spending, cut jobs in public sector and reform the social system and the healthcare system. In the European affairs,
he wanted more cooperation in the defence area, but at the same time aimed to create good relations with Russia.
Finally, on the far-right, we had Le Pen, a harder candidate on the immigration, security and European affairs. She is known to defend the reduce of
the presence of France in the European Union, regaining the control of monetary policy and border control. As for the labour market, the National
Front pursue to create a tax for the companies that will hire non-French workers. (Source: The Guardian)

The evolution of the voting trend has suffered several changes since the beginning of
the year. In January, the polls showed that Mr Fillon was in the lead but with the scandal
related to the misappropriation of public money, led to the fall of his favouritism in the
next months, leaving Mrs Le Pen and Mr Emmanuel Macron as the two favourite
candidates for the second round. On the 23rd of April, the first round took place and
the polls were confirmed with the following results: Macron with 24.01%, Le Pen with
21.3%, Fillon with 20.01%, Mlenchon with 19.58%, Hamon with 6.36%, Dupont-Aignan
with 4.7%, Lassalle with 1.21%, Poutou with 1.09%, Asselineau with 0.92%, Arthaud
with 0.64% and Chaminade with 0.18%. (Source: The Guardian). As no candidate won
a majority in the first round, the second-round campaign began, putting Mr Emmanuel
Polls of 2017 Presidential French Elections. Source: Financial Times Macron against Mrs Le Pen. The turning point of this campaign was the tv debate prior
to the second and final round occurred on the 3rd May 2017. This debate showed that both candidates were playing hard leading to some tense in
the debate with some of French Media calling to this debate as the dirty debate. On the 7th of May, the result gave the victory to the centre
candidate, with 66,1% of the votes (against 33.9% from Le Pen), making Mr Macron the 25th President of France. (Source: NY Times)

Market reactions, after the second round, did not follow the pattern expected, with
the anticipation of Macron's victory. On the following day, the EUR/USD opened at
1.1018 and closed at 1.0923, showing that besides Macrons victory is a sign of hope
for the EU and the eurozone, the euro still depreciated. Concerning to the bond
market, the France 10Y bond yield fell around 1.3 % and the Germany-France 10Y
bond yield spread narrowed to the lowest point since January, as showed in the graph.
For the stock market, the CAC 40 fell 1.09%, the DAX only declined 0.5% and the
Euro Stoxx 50 Index also fell 0.2%. (Source Investing) France, Germany 10Y bond yield divergenceSource: Bloomberg

In the political field, the reactions did not wait and the first person to congratulate Macron was the Prime Minister of UK, mentioning the intention
to maintain the strong partnership between these two countries, even with Brexit being a certainty. The German Chancellor Angela Merkel followed
and claimed that: Your victory is a victory for a strong united Europe and for the Franco-German friendship". From Bruxelles, the President of
European Commission said that was a happy day because the French People choose Europe and the European ideals. (Source: The Telegraph).

The election of Emmanuel Macron may represent the beginning of the end of the populist movement in Europe. This means that a new start for the
European Union and Euro area with more integration and cooperation may be ahead. Macron will face now a big challenge with the Legislative
elections scheduled to 11th June. Now, only time will answer if the new president will be ready for this challenge, and if he will have the capacity to
meet the needs of the French people while bringing hope for Europe.

DID YOU KNOW

that ECB voting system is partially rotating?

The main Monetary Policy decisions of ECB are taken under the Governing Council Board, which is constituted by six Executive Board members
and the nineteen central bank Governors of each country of Euro-area. The Executive Board has always right to vote, so the rotation applies to
the national Governors on a monthly basis and divided in two groups: Germany, France, Italy, Spain and the Netherlands (five biggest economies)
hold four votes and all others countries (fourteen) hold eleven votes. (Source: ECB)

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Financial Markets | fm@fepfinanceclub.org | http://www.fep.up.pt/skillsacademy/fepfinanceclub
 Contacts FEP Finance Club FX Team

Franklin Carneiro da Silva Joana Silva

Director of Financial Markets Analyst & Trader, Head of FX

Bruno Veiga Gonalo Santos Nuno Teixeira Rodrigo Camacho

Analyst & Trader Analyst & Trader Analyst & Trader Analyst & Trader

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MARKETANALYSIS

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