The Forex Market Outlook 2021 – What Can We Expect?
As you can imagine, the forex market is also inherently volatile, with this trend particularly pronounced during 2020 as a result of the coronavirus pandemic. More specifically, currency values declined as base interest rates were capped as part of wider quantitative easing measures, but this isn’t expected to continue through 2021.
In this post, we’ll preview the forex market for the year ahead, by focusing on some of the entity’s most important assets.
- The US Dollar
The greenback remains the single most popular currency in the world, with the USD established as the globe’s principal reserve currency since the end of World War II.
However, this currency also came under pressure in 2020, thanks to the rampant spread of Covid-19 and the introduction of two stimulus measures to help drive sustained economic recovery.
The U.S. Dollar Index (which measures the value of the greenback against a broad basket of currencies) has plotted this course, while losing significant ground as the Fed slashed rates and emerging currencies soared.
While the pressure remains strong and the U.S. Dollar Index slumped from 103 in March to 90 by the end of the year, however, the market consensus is that the greenback will rebound in the second half of 2021 after a further slump in Q1 and Q2. This growth will be driven by a global economic recovery and gradual hikes in base interest rates.
- The British Pound
While the USD may be the single most dominant forex market player, the British pound (GBP) is also established as one of the world’s most traded currencies.
This also endured a turbulent 2020, having continued to trade in a depreciating range against the backdrop of Brexit and the coronavirus. While a no-deal scenario was averted in the case of the former, the UK has yet to strike an agreement on services, and this could cause further devaluation of the GBP through the next 11 months.
With this in mind, the recent rise of the GBP/USD pairing may provide little more than temporary relief for investors, with the bullish trend that followed the initial Brexit trade agreement now starting to dissipate.
So, the fundamental outlook for the pound and the UK economy remains relatively bleak for the first half of 2021, while the GBP/USD may only become bullish if the greenback is further weakened in the near-term.
- The Australian Dollar
Unlike some of its contemporaries, the Australian Dollar (AUD) finished 2020 on a strong note, as the commodity segment (particularly iron ore) boomed and China continued its better-than-expected economic recovery in Q4.
Remember, Australia’s commodity-driven economy is heavily reliant on the sale of iron ore to China, while the wider trading relationship between these two countries is continuing to gain significant momentum across the board.
On another note, the AUD also escaped the worst excesses of the Reserve Banks of Australia’s dovish policy, primarily because other central banks across the globe adopted a similar approach.
The outlook for the AUD ultimately remains positive, although this could be undermined by deteriorations in trading arrangements with China and further disruptions to the sale and supply of iron ore.