This year, the foreign exchange market was heavily impacted 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 on individual fundamentals. In 2021, traders’ attention will slowly shift towards individual fundamentals although the pandemic will remain a major factor.
The U.S. Dollar Index, which measures the strength of the U.S. dollar against a broad basket of currencies, lost plenty of ground in 2020 as the Fed cut rates while the U.S. government provided an unprecedented amount of stimulus to the economy.
After reaching the 103 level back in March, the U.S. Dollar Index declined towards the 90 level. On the way down, the U.S. Dollar Index made only one serious attempt to rebound in September.
The pressure on the U.S. dollar is strong, and the market consensus is that the dollar will continue to move lower. While this year’s downside move may look significant, the U.S. Dollar Index may have more room to fall.
Back in 2008, the U.S. Dollar Index touched the 71 level before rebounding to 88. In 2011, the U.S. Dollar Index tested the 73 level.
Put simply, current levels cannot be seen as low for the American currency so it may easily gain additional downside momentum if the situation in the world economy improves and traders increase purchases of riskier currencies. The main risk for the bearish thesis is that shorting the dollar may become a very crowded trade.
Australian Dollar is set to finish the year 2020 on a strong note. The main reason for this strength is the recent strength in the commodity segment, especially in the iron ore market.
The dovish policy of the Reserve Bank of Australia had little impact on AUD/USD because other central banks were dovish as well.
The market consensus is that interest rates in the developed countries will stay at the bottom for the next several years, so the Reserve Bank of Australia may have an opportunity to put more pressure on bond yields without hurting the Australian dollar.
This year, Australia’s relations with its main trading partner, China, have worsened, but the interdependence of these countries is strong enough to prevent their relations from serious deterioration. I do not expect any major risks on this front.
Currently, the outlook for the Australian dollar looks bullish, but its future trajectory will depend on the continuation of the rally in the commodities segment.
EU and UK have just managed to negotiate the Brexit trade deal so the main risk for GBP/USD was not realized.
In recent months, GBP/USD was moving higher as traders bet on the successful outcome of Brexit negotiations (and these bets paid off), but now GBP/USD traders will have to find additional reasons to be bullish on the pound.
Currently, the UK struggles to contain the new strain of coronavirus which may put additional pressure on the country’s…
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