What COVID has taught us about forex trading?

The Covid-19 pandemic has taken a heavy human toll across the globe, with more than 44 million cases and 1.17 million fatalities reported as of October 29th.

Covid-19

Even accounting for this and the largely adverse socio-economic impact of coronavirus, however, it’s hard to argue with the assertion that the pandemic has also created opportunities for growth in some industries and financial markets.

One of the most fascinating areas of study is the forex market, which has been impacted in a number of ways by coronavirus. Here’s what the recent pandemic has taught us about forex trading in 2020.


Early Growth for the Dollar as Unemployment Skyrocketed

The WHO declared the coronavirus as a global pandemic on March 9th, at which point the international labour market began to take a significant hit.

This trend gathered significant momentum during Q2 in particular, with an estimated 26 million Americans alone forced to apply for unemployment benefits in a five week period during this time.

Even though the rate of unemployment in the states fell back to 7.9% in September from a peak of 14.7% in April, sustained job losses have created huge financial market volatility and sent a high volume of investors seeking out the sanctuary of safe-haven assets.

This selection of assets included a number of major currencies, including the US Dollar, the Japanese Yen and the Swiss Franc (along with more secure stores of wealth such as gold).

The greenback showed particular strength during Q1 and even Q2, with the so-called “Dollar Index” highlighting this trend clearly. While the index has embarked on a largely upward trend since the recovery from the great recession began in earnest, it has peaked in 2020 as investors have flocked to the relative strength of the dollar.

The Decline of the Dollar Index and More Recent Developments

Despite this, the Dollar Index began to slump during Q3, with this trend being borne out by the performance of the GBP/USD in this period.

This pairing has moved considerably higher since August, with rising Covid-19 cases in the US and the growing prospect of a $2.2 trillion stimulus package in the States causing significant volatility for both the greenback and the forex market as a whole.

Of course, this trend is being exacerbated by the upcoming US election, especially with Democrat candidate Joe Biden well ahead in the polls and his ascension likely to trigger a short-term contraction in the value of the dollar.

Of course, the long-term strength of the USD remains unmatched, while investors will also be interested to note that its performance has mirrored the trends recorded within the stock market.

Remember, major indexes such as the Dow Jones and the S&P 500 crashed in March after reaching record highs in February, before rebounding before a similar decline took hold in August and September.

This appears to suggest that emotion (as opposed to reliable data ) is driving these indicators, as investors react to the wider market and socio-economic climate and adopt an increasingly risk-averse approach.

However, this may be little more than a short-term trend, albeit one that’s likely to continue indefinitely as the widespread uncertainty continues across the globe.