What Might the Future Hold for the Top Currencies?

It goes without saying that 2020 was an unprecedented year in which many aspects of life were affected. While any number of nations around the globe can experience a range of change in any given 12-month span from natural disasters and political elections to regulatory shifts and economic swings the COVID-19 pandemic had a massive impact on markets, and their currencies, around the world. The shock waves of the coronavirus rippled throughout the forex market, as economies slipped into recession.

As much of the world works to rebuild and recover from these devastating impacts, it is time to both take a look back and peer forward. Read on to learn about what impacted some of the world’s largest currencies last year and in the first quarter of 2021, and check out the currency forecast for what the coming months might hold.

What is next for the US dollar (USD)?

One of the most popular currencies in the forex market, the US dollar (USD) has been a point of even further interest during the last four years, with a rather unstable political situation that has had major effects both domestically and internationally. In 2020, the country experienced a heated presidential election that saw Donald Trump defeated by challenger Joe Biden. 

But the USD falling more than 10% from its March highs was in large part due to the country’s handling of the coronavirus pandemic. The hardest-hit nation in the world, the United States was still seeing massive numbers of deaths from the pandemic late in 2020, when many other countries had already managed to flatten the curve. 

In 2020, citizens received a one-time USD$1,200 stimulus cheque. Now, looking ahead in 2021, one of the first places to look is at the decisions and benchmarks that have been made by the Biden administration. So far, the COVID-19 recovery is showing more promising signs for the Biden administration than that of Trump. As the pace of the vaccination rollout improves, so does the outlook for the US economy. Unemployment has already fallen from its peak of 14.8% in April 2020 to 6% in March 2021

If the federal government, along with local politicians, can continue to positively influence citizens to take the virus more seriously and follow public health guidelines, cases will go down, which will allow for the easing of restrictions, the reopening of entertainment, retail and hospitality venues, and an overall boosted economy.  

Biden’s $1.9 trillion COVID Relief Bill, which was passed in March 2021, will most importantly see $1,400 direct payments to low- and middle-income Americans, and is among several other programs and initiatives to help restore the economy. Biden’s recently unveiled $2 trillion, eight-year “American Jobs Plan” seeks to boost the economy through investment in a range of industries from roads to power grids to improving state buildings.

Federal Reserve officials predict that the unemployment rate will drop to below 4% by 2022, and Bank of America’s strategists expect US growth to outpace that of the EU. The Bank of America team projects the US dollar will grow by 6% in 2021 and 4.5% in 2022, exceeding the consensus estimates of 4.1% and 3.5%, respectively.

Is the Euro (EUR) set to rise?

The Euro is the second most popular reserve currency in the world, after the US Dollar. It is also the second most commonly traded currency in the world. 

As with the United States, the coronavirus pandemic led to sluggish economies around the European continent on the back of lockdowns and lost jobs, denting spending capability. However, when compared to some of the other traditionally stable currencies that slid in the forex market, the Euro remained relatively strong in 2020.

Unfortunately, a series of false starts with the AstraZeneca vaccine rollout has seen a decline in public confidence in the drug, subsequently slowing its acceptance and overall campaign across the Eurozone. As of March 2021, Europe had received only one third of the AstraZeneca vaccine doses it was promised. At this point in time, the US is also expected to vaccinate 75% of its population 13 months ahead of the Eurozone. Overall, these hiccups have come as a setback for any growth in the Euro.

What does 2021 hold for the British Pound Sterling (GBP)?

The Pound took a hit in 2020 due in large part to a second wave of coronavirus that caused further lockdowns and restrictions around England. Great Britain was perhaps the hardest hit of the G10 countries during the COVID-19 pandemic, putting it well behind its peers in terms of recovery. Overall, the country was hit with the hardest recession of any of the major economies in the world one that is expected to stick around for months to come.

British pound sterling (GBP)

The effect of Brexit, which occurred in January 2020, is expected to emerge slowly, but will likely be permanent. The UK in a Changing Europe Research Centre predicts that the UK economy will fall by 4.9% over 15 years. This will add increased pressure on the GBP, which has been weakening over the last couple of decades. Good news came in December 2020, when the European Union and the UK signed a free trade deal, which came into effect on January 1, 2021. The trade deal prevented any tariffs and quotas from being introduced as a result of Brexit, which would have made it more expensive to trade, but this does not guarantee the permanent removal of tariffs in the future. 

A positive factor that is helping to boost the GBP is the faster pace at which the UK is vaccinating as compared to Europe. As of March 2021, experts estimate that the UK will outperform the rest of Europe beyond Q1 2021.

Right now, the weakened USD is keeping the GBP/USD exchange rate afloat. But if the US is able to rebound as strongly as predicted in 2021, the pound sterling forecast could be even more dire.

Is it only up from here for the Australian dollar (AUD)?

Despite handling the coronavirus pandemic well in relation to other countries around the world, Australia plunged into a recession in 2020, its first since 1991, due to COVID-19 ramifications. Because of this, the Royal Bank of Australia dropped the interest rate to a record low of 0.1% in November, diminishing the value of the country’s currency. 

In March 2020, the AUD dropped to an 18-year low of $0.55, but climbed back to its highest level in two years in September 2020, due to the US dollar hitting a two-year low and commodity prices, such as those of iron ore and gold, improving.

In addition to the impact of the coronavirus, Australia and its largest trading partner, China, have continued to clash over several issues. Despite these quarrels, economists have predicted a positive outlook for the Australian dollar, as we see strong commodity prices and high volumes of export sales. Although China is diverting its sources of agricultural products to the US and away from Australia, Australia thankfully has alternative agricultural export markets that can potentially uphold commodity prices and demand. Should commodity market dynamics remain constructive, the Australian Dollar is likely to remain strong.

It remains to be seen just how big of an impact the Aus-China row will have on the importing and exporting of vital commodities between the nations making the Australian dollar even trickier to forecast for the rest of the year. One potential setback would be the tightening of financing conditions around the world, particularly in the US. If the yields paid on US bonds are increased, along with borrowing rates in general, this will, in turn, have a negative impact on the AUD-supportive rally in commodity prices.

With the global economy starting to recover, currencies such as AUD could benefit more than traditional powers like USD, making continued AUD/USD growth a strong possibility. 

How does the Japanese Yen (JPY) look in 2021?

 

The Japanese Yen is the third most traded currency in the world after the US dollar and the Euro. In August, Shinzo Abe resigned from his position as prime minister and we saw Yoshihide Suga take his place. This political turning point, combined with the effects of COVID-19, led many to believe that the Japanese Yen would weaken. So, too, would the postponement of the 2020 Olympic Games in Tokyo, which were pushed back to July 2021. 

However, with the drastic drop in interest rates in the United States and across Europe, JPY actually stood out above its peers in terms of holding value. Increased interest in the technology sector globally also helped to bolster the local Japanese stock market in 2020. In the final quarter of 2020, domestic traders decided to keep their investments closer to home instead of buying into the US.

Japanese yen (JPY)

When looking into the future, it is difficult to forecast what will happen with JPY for several reasons. The policy priorities of the new prime minister, Suga, will be an important watchpoint throughout 2021 and will impact how the Yen performs. If new policies are implemented to help improve the economy, the Yen could continue to strengthen. The 2021 Olympics will also help to boost Japan’s economy, although to a lesser extent than previously expected, as the games will run at a smaller scale and overseas fans have been banned from attending in a bid to reduce coronavirus risks. 

The US dollar is another factor that can significantly influence the Yen. Generally, when the USD gets stronger, the Yen typically gets weaker and vice versa. The Yen is also considered a “safe haven” currency, which means it will move up against other “higher risk” currencies when there is increased uncertainty in the world. So, the performance of the Yen largely depends on how long the pandemic impacts countries and what global response is taken by different governments around the world. 

It will be interesting to see how the remainder of the year unfolds as economies around the world try to rebound from an extraordinarily difficult time during the global pandemic. While a currency forecast can be a good tool in your forex trading strategy, it is important to remember that it is just a forecast. As with meteorology, it might not happen exactly as the experts suggest.

Put your own forex trading strategy into practice with the help of the eToro trading platform, which lets you trade across a range of markets and gives you access to our great CopyTrader platform. This allows you to follow the lead of some of the best traders out there. 

 

425 views