Covid causes volatility in forex markets

There is hope is in the air as Covid-19 vaccine rollouts gather pace across the globe and economic stimulus packages are implemented to help nations recover from the pandemic. Last year, the markets experienced volatility with most instruments hitting extreme highs and lows.

The forex market was no different, as currencies are often at the mercy of external factors like recessions, government debt, interest rates and inflation levels. Now well into 2021, it’s clear that the forex market’s volatility is not quite over yet.

Currencies are an indicator of economic health so we take a look at some of the most heavily traded currency pairs in the forex market to see how their performance ties into each country’s economic situation and what the future holds.

Europe’s struggle with Covid-19 continues as the region is grappling with further waves. This has led to the Euro sliding in a big way, particularly against the US Dollar, which has been buoyed by the increase in US treasury yields and the possibility of an infrastructure bill that could benefit Wall Street. Another contributing factor to the Euro’s decline is the slow vaccine rollout in Europe compared to the US, which will have offered the vaccine to about 90 per cent of its citizens by the end of April.

The EUR/USD power pair began 2021 on a high note but has been on a slow decline since then, with a brief uptick in February. The pair closed at 1.22511 on January 3 and then began a downward slide of 2.3 per cent to close at 1.19674 by February 4. It was followed by a brief rise of 1.6 per cent over the month to reach 1.21705 by February 24. However, the pair continued on the downward slope to fall by another 3.1 per cent to finish the first quarter of 2021 at 1.17282 on March 31.

With foreign exchange being the top market for trade by volume, many traders are keenly awaiting President Joe Biden’s infrastructure plan as this could have a huge impact on the US Dollar and, therefore, the forex market. Europe’s vaccine rollout and management of the Covid-19 situation this year could be another factor in forex trading prices, along with the upcoming distribution of the European Union’s (EU) recovery funds. Forex trading with the EUR/USD pair could continue in volatility throughout 2021.

Towards the end of March, the US Dollar hit a one-year high against the Yen and had a quarterly gain of 3.56 per cent, the largest since June of 2018. The US Dollar has become more attractive for investment as the country forges a path towards economic recovery, and this is helping the currency achieve huge gains this year. Even though Japan’s economy had a large amount of recovery towards the end of 2020, it still shrank by 4.8 per cent for the year.

While the world’s third-largest economy is on the path towards economic recovery, it may be a little slower due to Japan’s slower vaccine distribution, according to Takumi Tsunoda, a senior economist at Shinkin Central Bank Research.

The USD/JPY pair has been on the rise since the beginning of the year. The pair started 2021 on a closing price of 103.257 on January 3 and went on a steady trip upwards, with a brief sideways movement at the beginning of March. The USD/JPY pair increased by 7.2 per cent from January 3 to March 31, closing on a price of 110.769 to finish off the first quarter of 2021.

The pace of each country’s economic recovery remains uncertain to an extent, as it largely hinges on the vaccine rollouts and stimulus package distribution and effectiveness.  

All of this volatility can be quite enticing to those who are looking to begin their forex trading journey, however, it’s important to remember that volatility also poses risks. If you’d like to enter the market by forex trading with iFOREX, make informed decisions by enhancing your knowledge.