What Is Expected In The Forex Market In 2021?
This year, the currency market was badly affected by the coronavirus pandemic. Currencies were often bought and sold based on traders' desire to increase or decrease their exposure to riskier assets, rather than individual fundamentals. In 2021, traders' attention will slowly shift to individual fundamentals, although the pandemic will remain an important factor.
The US dollar index, which measures the strength of the US dollar against a broad basket of currencies, lost a lot of ground in 2020 when the Fed cut rates while the US government gave the economy unprecedented boost.
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After hitting the 103 level in March, the US dollar index fell to the 90 level. On its way down, the US dollar index only made one serious attempt to rebound in September.
Pressure on the US dollar is strong and the market consensus is that the dollar will continue to decline. While the downward move this year may seem substantial, the US dollar index could have more headroom for decline.
The US dollar index hit the 71 level in 2008 before recovering to 88. In 2011, the US dollar index tested the 73 level.
Simply put, the current level for the American currency cannot be considered low, so it can easily gain additional downside momentum as the world economy improves and traders buy more risky currencies. The main risk to the bearish thesis is that short selling the dollar can become a very crowded trade.
The Australian dollar will close 2020 on a strong note. The main reason for this strength is the recent strength in the commodities segment, particularly in the iron ore market.
The Reserve Bank of Australia's cautious policy had little impact on AUD / USD as other central banks were also cautious.
The market consensus is that developed market rates will remain at their lows for the next few years, potentially giving the Reserve Bank of Australia the chance to put more pressure on bond yields without hurting the Australian dollar.
This year Australia's relations with its main trading partner China have deteriorated, but the interdependence of these countries is strong enough to prevent their relations from deteriorating seriously. I don't expect any major risks on this front.
At the moment the outlook for the Australian dollar looks optimistic but its future development will depend on the continuation of the rally in the commodities segment.
The EU and UK just managed to negotiate the Brexit trade deal so the main risk to GBP / USD was not identified.
In recent months, GBP / USD has risen as traders bet on the successful outcome of the Brexit negotiations (and those bets paid off), but now GBP / USD traders need additional reasons to be bullish on the pound.
Currently, the UK is struggling to contain the new strain of coronavirus that could put additional pressure on the country's economy. Additionally, the economy could be affected by Brexit, although the magnitude of the blow will not be as severe as in the case of a no-deal Brexit.
The fundamental situation looks challenging for the UK economy in the first half of 2021, which could put some pressure on GBP / USD, which will need additional upward catalysts after the end of the Brexit negotiations. While the pound may have more wiggle room, the GBP / USD bulls are likely to need help from the general weakness of the US dollar.
Just like other major central banks, the Bank of Canada will be forced to provide material support to the economy until inflation shows some signs of life. Canada is also suffering from the second wave of the virus, although the situation stabilized in December. It remains to be seen whether this second wave will put additional pressure on the Canadian economy.
Oil price dynamics will remain a key catalyst for USD / CAD in 2021. If WTI oil manages to stabilize above the $ 50 level and gain more upside momentum, commodity-related currencies like the Canadian dollar will get an extra boost.
At this point, the outlook for the Canadian dollar looks favorable. The main risk to Canadian dollar bulls is the sudden general strength of the US dollar.
The European currency showed significant strength at the end of this year. In recent years, EUR / USD has been under pressure due to the cautious policy of the European Central Bank and the disappointing growth rates in the euro area.
However, the pandemic gave the euro significant support as traders turned their attention to the problems of the US dollar. The main question for EUR / USD in 2021 is whether it will be able to hit the 2018 highs at 1.2500.
While the ECB may be disappointed with the recent appreciation of the euro, which will put more pressure on economic growth, there is little it can do to prevent the euro from rising higher.
The interest rate is already at the low end, the asset purchase program is working, and while the ECB reiterates that it does not run out of options to support the economy, there are limits to a central bank's power.
Traders know this, so EUR / USD bulls will likely attempt to test new highs early in 2021. If this early test shows that demand for the euro remains high, then EUR / USD has a good chance of developing a strong uptrend against the US dollar over the next year.
This year has been a very interesting year for forex traders, and next year is likely to be more volatile.
Market attention will be focused on the fate of the US dollar, which may come under more pressure if the Fed continues to print money as the global economy recovers from the blow of the pandemic.
Commodity currencies like the Australian dollar and Canadian dollar may receive more support if the demand for commodities continues to grow along with the economy.
It will be very interesting to see if the British pound can continue its upward trend after the UK successfully negotiated a trade deal with the EU.
For the euro, it could be another year of strength against the US dollar despite the current problems facing the European economy.
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This article was originally published on FX Empire
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