Forex Pairs USD, GBP & EUR: What to expect?
In 2020 the market was driven by headlines and politics, but we’re now starting to see a return to economic data driving the market.
We expect the below key themes to emerge this month:
• Currencies are not currently following 2020 trends which saw safe-haven currencies move in opposition to ‘risky’ currencies and equities. Instead, they are following leading indicators of economic growth.
• The scale, speed and efficiency of COVID-19 vaccine rollouts is an important factor driving direction of the major currencies.
• Market participants are showing sensitivity to any central bank releases or economic data that undermines the narrative of economic recovery, either could put downward pressure on currencies.
USD
From March 2020-January 2021, the US dollar index (DXY), which measures the value of USD against major trading pairs, lost more than 13%. In February, the index reached its highest level in two months. This represents a recovery of only 2% since its year-to-date low, suggesting it might have potential to further gains in the coming weeks. Risk appetite cooled following stock market volatility in late January. This sentiment, coupled with new virus strains, vaccine rollouts and uncertainty around a US stimulus package, drove demand for the USD as a safe haven. The return to risk-on investing in early February would usually mean downward pressure on the USD, but this isn’t the case, with the USD making gains alongside equities. In February, USD looks to be poised to make gains in either a risk-on or risk-off environment.
GBP
The pound had a strong start to February gaining against both USD and EUR with the currency benefiting from continued positive COVID-19 vaccine news. The UK is on course to achieve the target of 15m people getting a first injection by February 15th. The UK’s program is ahead of the US and way ahead of EU countries such as Germany, Italy and France. If the pace of vaccinations continues to curve upwards, then we should expect a strong rebound in GDP for the second quarter of this year. As COVID-19 cases ease, investors will be attuned to positive announcements around businesses reopening or any other signals of economic recovery. As expected, Bank of England held interest rates with no change on policy in their first interest rate decision of 2021, cheering markets. Continued positive momentum could see GBP outperform the other major currencies. We expect GBP to trade within a range of 1.3550-1.3810 USD in February.
EUR
Those hoping for euro strength throughout 2021 will likely be feeling concerned as the bloc’s lacklustre vaccination programme sees it fall further behind the UK and the US with regards to the percentage of the population receiving a dose. Demand for the USD has outpaced demand for the euro at the beginning of 2021. In early February, EUR/USD broke the key 1.20 handle and EUR/GBP broke a key support level of 0.88 as the “vaccine trade” became a key area of focus. Any news around additional restriction measures in the coming weeks could compound the euro’s current challenges. The outlook looks weak for the euro against other majors in the short term, and we expect it to trade between 1.1850-1.2150 USD.
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