What impact has COVID 19 had on Foreign Exchange?

MillTechFX Marketing Team
Posted by MillTechFX Marketing Team on Dec 7, 2020 5:16:16 PM

COVID 19 has already had a devastating impact on the global economy and has caused unprecedented levels of volatility.

COVID 19 has dominated 2020, but its impact has been incredibly unpredictable. This is a crisis; the likes of which markets have not seen before. As such, forecasting which way things will go can be extremely difficult. The result has been a whipsawing of currencies as they try to react to the latest news.

One currency to benefit from the pandemic has been the USD. With most of the year being dominated by bad news, as a first wave moved seamlessly into a second, the dollar has experienced high demand. During times of high risk and volatility, investors tend to flock towards the dollar as a safe haven.

However, those gains have dropped off in recent times with all the good news coming out of vaccine trials. Three vaccines from Oxford, Moderna and Pfizer have shown excellent phase 3 trial results. Pfizer’s vaccine has been approved by the UK with 800,000 doses (enough for 400,000 people), expected to be made available this week.

Moderna’s vaccine, meanwhile, has applied for emergency regulatory approval with the US and EU.

This has been bad news for the dollar, which has benefited with the recent economic uncertainty. The euro has pushed through the psychologically important 1.2 barrier with some analysts suggesting it could hit 1.22. GBP has surged to three-month highs of 1.3440

The data has seen the dollar slip back against currencies such as the Euro and Australian Dollar which do better when investors are willing to embrace a little risk. EUR has experienced considerable gains at the time of writing, pushing up towards the European Central Bank’s 1.2 line in the sand. This is the point beyond which it does not want the pair to go for fear of harming the EU’s recovery.

The Australian dollar, meanwhile, has been swinging between support and resistance depending on demand for risk. At the time of writing, the Australian dollar has been riding high against the dollar although it has dropped in early trading on Monday 7th Dec, as demand returned for USD.

Sentiment around the US economy is also mixed. A number of experts including Federal Reserve Chair Jerome Powell and Janet Yellen, who is tipped to be the next Secretary of the Treasury, have called for fresh stimulus, something which would weaken US real yields and undermine the attractiveness of the dollar.

There was more sluggish news in the ADP jobs report which showed small businesses added 110,000 jobs to the economy, in October / November. That’s down slightly from the previous month and a long way off the nearly 1 million added in June.

Beware of the switch

However, as always with COVID 19, there are many different stories going on. For all the optimism about a vaccine, none have yet been fully approved and elsewhere pandemic related news is not so good.

Countries in Europe including Germany, the UK and France have imposed fresh restrictions with warnings of more economic woes ahead. The Eurozone has seen a string of disappointing economic data over the course of the past week on employment and growth. In Rishi Sunak’s latest spending review, he warned of the greatest drop to GDP in 300 years.

However, the hopes of a deal on Brexit and the prospect of a fully functioning COVID virus are underpinning GBP bulls who see hopes of a reasonably strong recovery. 

Overall, the picture is fluid. The market is getting a host of different signals: some good, some not so good. At the moment sentiment appears to be looking on the bright side, perhaps a sign that good news has been preciously thin on the ground during 2020.

However, with cases continuing to rise, and with some experts warning of a fresh surge in January, the chances are we’ll see a few more sudden COVID related moves before this crisis is finally done and dusted.

Volatility is and will continue to be the name of the game, and anyone involved with FX should be prepared for more sudden twists and turns along the way. In such an environment, those who are agile and flexible enough to react quickly to the markets as they move will thrive.

In such times it’s important to have a partner who understands the market and helps you be as flexible as possible. With our groundbreaking multi bank platform, we can take the leg work out of FX execution to free you up to focus on these wild and unpredictable markets.

To discuss how MillTechFX can support you, arrange a call with one of our team members, or please contact us here.

 

Keywords: Brexit, forex, foreign exchange, GBP, Europe, UK, FX execution.

Picture: Money photo created by freepik.

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