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The EUR/USD Year of Volatility

The rollercoaster ride that is 2020 continues, and as we finally inch towards the end of the year, the ride is getting even wilder. Ups and downs are rife in the market, and each seems more drastic than the last. Political changes and the ever-present pandemic are the drivers of much of the financial market unpredictability, and just like a rollercoaster ride, the crescendo of 2020 seems to be happening right at the end. The US elections brought about many different reactions in the market, and part of this was amongst the foreign exchange sector. That, along with recent second waves of the Coronavirus across Europe and other parts of the world have led to an interesting year for certain currency trading pairs, particularly EUR/USD. Let’s take a look at how world events can impact foreign exchange, and how the most recent events have affected popular forex trading pairs.

World events and forex

Foreign exchange is seen by many traders as a crucial determining factor for a country’s economic health. In fact a country’s economic stability is largely reflected by the currency’s performance.1 In the case of political events, a change in government often has a knock-on effect for a currency as economic policies can be changed or new policies added by the new government that can impact the country’s economy.2 Other big factors that can affect foreign exchange are natural disasters, like hurricanes and tornadoes, and, as this year has shown us, pandemics.2 So, like we’ve seen on the news, these situations can lead to loss of life, infrastructure changes, and lower economic productivity, which in turn can lead to a currency decline as economic activity slows down and countries spend money on rebuilding and recovery.2

Each time a country’s currency is impacted by an event, this can affect its value and how it trades in the market compared with other currencies. As currencies trade in pairs, they can be even more volatile as each currency experiences its own changes which can impact the pair. So, while forex is one of the most volatile sectors of the financial markets, it can also be one of the most telling.

Newfound optimism for the euro

Since July, the euro has been trading between $1.16 and $1.20, which is a middle of the road area for the currency.3 This is largely due to the flurry of Coronavirus second waves and the US election news, as the euro tries to find its feet again.3 

However, the last quarter of 2020 has brought some optimism to the markets as Joe Biden won the US elections, and Pfizer and BioNTech announced that their vaccine candidate is 90% effective amongst participants in their clinical trials. The forex market has seen a benefit from this optimism, with the euro and the British pound holding steady against the US dollar recently.4

At the time of writing, the EUR/USD pair is trading at 1.17803, and is coming down from a recent high of 1.18934. On November 2nd, the pair hit a low of 1.16415, and then shot up by 0.6% over the next six days to close at 1.18934 by the 8th. However, second waves of the virus are dampening the performance of the euro, and the pair slipped slightly slower at the time of writing, as lockdown measures around Europe get more stringent, and uncertainty creeps into the markets again. Another factor which may come into play soon for the euro is the post-Brexit trade deal between the UK and the EU, which is set to conclude presently, however, this is not 100% certain yet. Either way, whether or not the trade deal is finalised, the euro could be impacted, and therefore it’s worthwhile for forex traders to pay attention to world events closely.