Forecasting Methodology For A Forecasting Approach

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Forecasting Methodology
Various fundamental approaches exist in forecasting future exchange rates. The key approaches discussed below will include Purchasing Power Parity (PPP) and Asset Market Approach. The balance of payment approach will be utilised instantaneously with other methodologies in order to establish a forecasting methodology for EUR and USD against the AUD. Emphasis will be placed on PPP, International Fisher Effect and the Asset Market Approach.

Purchasing Power Parity Approach
Based on the underlying principle of the PPP, the exchange rate will affect the offset price changes to due inflation. Using the data obtained from Reserve Bank Australia (2017) and The European Central Bank (2017), the following
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Australian Economic Outlook:
The Real GDP % forecast for Australia is currently 2.8% and expected to decrease by 0.3%. The unemployment rate is predicted to remain at 5.9%, in line with market expectations (The Australian, 2017). The consumer prices in Australia increased inflation to 2.1% in 2017, with the market expected to rise a further 2.2%, making it the highest inflation rate since 2014 (Trading Economics, 2017). The current Government Bond 10Year Yield is 2.58%, indicating a consistent and stable economic growth (Trading Economics, 2017). It is important to note the increase in strength for the interest rates of USD and EUR against the AUD. (Economist, 2017). The RBA is unlikely to raise interest prices due to debt re-payment increase, which would has a negative economic effect due to the unbalanced supply and demand ratio within the market (The Economist, 2017). In correspondence with future political uncertainty, speculation is created over AUD depreciating against the USD within the next year from 0.77 to 0.66 and against EUR from 0.71 to 0.69 (Australian Dollar Forecast, 2017).

United States Economic Outlook:
The characteristics of the US economy indicate a strong growth within the market over the next year in comparison to Australia. The US GDP Growth Rate is currently the lowest it has ever been at 0.7%, and it is expected to increase to 1.3% by 2018 (Federal
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