The corona-virus pandemic has undoubtedly scarred the global economy, including the Forex market. While in regular circumstances, the analysis of the Forex market is predicated on market charts and interest rate news, the same cannot apply in this situation.
Today’s market is largely influenced by news related to the COVID-19 outbreak, which requires the analysis of more than usual data points to find out what’s affecting major currency pairs nowadays.
What’s the Real Effect of COVID-19 on Forex?
In a recent webinar held by Refinitiv, Wilson Leung, head strategist at currency trading advisory company TrendsetterFX, talked about how the coronavirus crisis continues to affect the Forex and other financial markets for some time.
Leung used a set of market data points to demonstrate his research and said he believes the global demand for the dollar will continue. One of the biggest factors that have to be taken into account when conducting such an analysis is unemployment.
As a result of the epidemic and lockdown restrictions, the unemployment has gone through the roof and the rising job cuts are what makes this crisis worse than other financial crises. During the Great Depression in 2019, the unemployment rate in the States was at around 3.2%, while during the global financial crisis in 2009 the unemployment rate in the U.S. reached an all-time high of 9.9% at that time.
After that, the unemployment rate in the U.S. started recovering and dropped to as low as 3.5% in 2019. However, in 2020, following the start of the coronavirus pandemic, over 26 million American citizens applied for unemployment benefits in a period of just a few weeks.
According to some American economists, the current unemployment rate in the country is standing at around 13 per cent, and still increasing. In theory, the dollar should feel weakness if the U.S. economy is under the pressure.
Another factor that should be taken into consideration when analyzing the epidemic’s impact on Forex is the stock market. This crisis was defined by the so-called risk-off trading patterns, which resulted in increasing demand for the USD thanks to its status as the global reserve currency.
During the high market volatility, the stock market has shown some optimism through major stock indexes like the S&P 500 and the Dow Jones Industrial Average, indicating ‘risk-on’ patterns, which signals that traders are selling the dollar.
What it actually means is that during periods such as this one, emotions are what drives these indicators, not data. In other words, the current Forex prices are most likely not reflecting other fundamental factors as the health situation dominates world’s headlines.
The analysis of these major indicators like the U.S. equities, U.S. interest rates, and unemployment rates indicates the dollar’s stability, as reflected in the Dollar Index, or DXY. However, the dollar is under pressure as the Federal Reserves unleashed trillions in support to the troubling economy. The higher the amount of dollars in circulation, the lower the value of the currency actually is.
In conclusion, during periods like this one, which always involves highly volatile market swings, investors should turn to the safe-haven assets such as the dollar, the Swiss franc, the Japanese yen and gold, in the short run.
However, it is still early to provide a full insight into how much this crisis has actually damaged the global economy and what kind of consequences it will leave in the future.
If You Want to Become a Successful Forex Trader, You Must Join AndyW Club.
In AndyW Club you can get exclusive Forex trades, analysis and signals notifications via dedicated APP, E-Mail or Telegram. Click Here and Join AndyW Club Now – You Can Cancel Anytime, No Questions Asked!