In the year 2020-2021, the foreign exchange market has faced a drastic impact due to the Coronavirus pandemic. Major currencies were most often purchased and sold according to the desires of the trader to increase or decrease their exposure to assets that are riskier. In the year 2021, the focus of the traders will gradually move towards individual fundaments through the COVID-19 pandemic will still remain one of the biggest obstacles.
2020 was the year when COVID-19 infection had spoiled the plans of both participants and travellers in the financial markets. While some tried to make money, others couldn’t as they failed to accept the new reality. It is indeed a wrong notion to assume that the volatility of the current market as well as the Coronavirus pandemic will stay put in this year.
The American Dollar Index, which calculates the power of the US Dollar against several other groups of currencies, lost ground in 2020 as the Federal Reserve cut rates as the American government offered an amount of stimulus to the US economy. It reached the 103 level in March and the US dollar index declined to the 90 level.
There is strong pressure on the US dollar and as per market predictions, the dollar will keep moving lower. Though this year’s downside move will look significant, the US dollar index can have more room to fall back on. In 2008, the US Dollar index touched the 71 level before reaching back to 88.
Australian Dollar has completed the year 2020 on a rather strong note and the main reason behind this is the commodity segment, due to the iron ore market. The Reserve Bank of Australia’s dovish policy had very little impact on both USD and AUD as all the other central banks were also dovish. The consensus of the market says that the interest rates in other developed countries will remain at the bottom for many years and hence the Reserve Bank of Australia will get a chance to exert more pressure on yields of bonds without even dampening the value of the Australian dollar.
EU and UK have recently tackled negotiating the Brexit trade deal and so the risk for USD/GBP wasn’t realized. In recent months, USD/GBP was moving as traders bet on the result of Brexit negotiations but now USD/GBP traders will need to find added reasons to feel bullish on the pound. Since the UK is still struggling to contain the latest strain of Coronavirus, this is putting an added pressure on the economy of the country.
For the UK, the fundamental situation seems challenging for the British economy during the first half of 2021 and this exerts pressure on USD/GBP. As the pound might have some more room to improve, the USD/GBP bulls need more help from general US dollar weakness.
Therefore, though 2020 was an interesting year for the forex market, 2021 will certainly bring in more volatility. The attention of the market will be focused on the fate of the US dollars which can find itself under more pressure when the Fed keeps printing money as the world recovers from the jolt of the COVID-19 pandemic.