Forex is a truly global market, with buyers and sellers from all over the world participating in trillions of dollars of transactions every day. The fact that foreign exchange trading has become a global activity means that macroeconomic events everywhere are playing more great effect.
Foreign exchange trading is more important than ever. Traders no longer have to continue to use popular currencies, but they are a good starting point. At the end of a turbulent year, preparing for the business in this pandemic period is more important than ever, but knowing how to fully face the future is difficult.
The rise of geopolitical themes such as the trade war and the growing influence of politicians on financial markets have gradually but significantly increased the complexity of judging future market trends and their impact on international business of finances. Now, adding COVID-19 to the portfolio brings a whole new dimension to global market analysis.
The pandemic has caused widespread and rapid damage to the global economy, technology, and infrastructure. Now, the global business arena is under tremendous rebound pressure. After all, the world is still living in the worst economic recession in modern history.
During the Great Depression, more than 90% of countries may experience annual economic contraction, and emerging markets collectively face the risk of the first year of no growth for at least 60 years. The time to return to pre-crisis economic levels is still very uncertain, and the successful reliance on newly developed vaccines makes the recovery more binary, which polarizes any forecast for next year.
Fortunately, the positive development of vaccines in recent weeks has boosted the prospects for recovery and increased the risk appetite of the entire financial market, prompting investors’ investment portfolios to shift to cyclical investments, which will be beneficial to the UK market.
Looking ahead to 2021, as exchange rate fluctuations have a huge impact on the profitability of international trade in goods and services, the volatility rate has jumped to the forefront.
With the company now transitioning to next year’s “new normal” and carrying out a restructuring plan, the risks to financial goals brought by economic and currency fluctuations remain severe.
Forex: a range of challenges across GBP, USD, EUR, and AUD
After years of relatively high-interest rates, interest rates in the United States are now in line with other developed countries: close to zero. Recently, the U.S. dollar has regularly hit new 2½-year lows. The increase in global risk appetite has expanded the circulation of capital from safer assets such as the U.S. dollar to high-risk, high-yield investments such as stocks, copper, oil, emerging markets, and commodity currencies.
If this trend of weakening the U.S. dollar continues, then 2021 may allow GBP/USD to enter a higher level of 1.30 U.S. dollars. On the other hand, there are not too many positive catalysts for the pound.
As the Bank of England is still actively reviewing its negative interest rate policy, more and more speculations about further interest rate cuts in the UK may limit the rise of the pound. The UK-Europe deal that will expire on December 31 is still a major uncertainty, which may drag the GBP/USD back below 1.20.
Regarding the pound/euro-the trend may mainly depend on the success of the global economic recovery. Will the recovery rates are different in the UK and Europe, especially remember the UK’s recognition of Pfizer and BioNTech vaccines? In these two areas, how will the government manage the potential second or third wave of viruses?
The long-term impact of the coronavirus on the economy of the UK and the Eurozone may not be realized until the end of 2020 or even 2021, because policymakers in both regions have provided tremendous support in protecting work and reducing bankruptcy.
Reaching a no-trade agreement with Brexit is also the main risk that lingers in these two regions, although the UK and therefore the pound is expected to suffer a greater blow in the short term. After all, the pound is very sensitive to negative news about Brexit.
Once the media hints that the Brexit trade talks are about to end, the pound/euro will fall. Under these circumstances, expectations of GBP/EUR parity are growing, especially if this also triggers a referendum on Scottish independence. On the contrary, the trade agreement should help the pound/euro climb to 1.20 euros.
The unfolding effect of COVID-19 will also affect the Australian dollar. The trend of GBP/AUD depends largely on whether the second or third round of coronavirus will weaken the hope of economic recovery and trigger risk aversion in the entire Forex market. Historically, the Australian dollar has outperformed the British pound during the economic recovery period.
If the financial market makes a comeback after a new round of lock-in measures, investors may abandon high-yield assets, including the Australian dollar. According to the March trend, the GBP/AUD may rise as a result.
China also plays a key role here, China has been involved in multiple economic and geopolitical disputes, including disputes with Britain and Australia. The escalation of these disputes may lead to economic sanctions, posing a serious threat to Australia’s hopes for recovery.
Preparation, preparation, preparation…
Therefore, although global companies can hardly know exactly what will happen in the future, and although there is no single method suitable for all Forex risk management methods, the overall goal of achieving cash flow certainty and protecting profits from changes in foreign exchange rates must remain unchanged.
Although future scenario testing and subsequent risk analysis are still a huge challenge for many companies, it is still crucial for many companies to deal with exchange rate fluctuations.
Looking forward to 2021, business decision-makers must always focus on the basic components of hedging strategy formulation, and regularly review the strategies adopted throughout the holiday period and before 2021 to ensure that each company’s Forex risk management goals continue to be met.