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What COVID Has Taught Us About Forex Trading

What COVID Has Taught Us About Forex Trading

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When the first waves of the COVID virus started, many businesses and the entire world economy were struck hard. The fall of global GDP in 2020 resembled that of 2009, although the numbers are quite different – curtesy of the development of the world.

Millions worldwide lost their only source of income or were heading that way. Even two years later, there are still after effects, and many companies and businesses are sold or closed.

This led many people to completely focus on forex trading, which seemed as one of the better options to retain or gain income. For the entirety of 2020 and most of 2021, the increase of forex accounts skyrocketed as people were trying out their luck.

Let’s see what COVID has taught us about the forex market.

Unemployment Led to An Increasing Number of Traders

2020 and 2021 were crucial years for all trading markets, including the FX. Many people lost their jobs, and the only way they saw to support themselves through this situation was by turning to the FX market.

Some of the best forex brokers reported increased traders using their platforms. This growth in FX accounts was most noticed in developing countries such as countries in Africa, Southeast Asia, and Eastern Europe. These saw an increase in forex traders of around 60%.

The one negative side to this upsurge in forex accounts and trades was the downfall of smaller brokers. This was due to the increased liquidity demands, which meant that smaller brokers weren’t the choice for most traders.

The established, big brokers were a safer choice regarding withdrawal, which is why many new and experienced traders and investors were going to them. Some of the more well-known brokers saw increasing numbers in trading volumes. From March 2020 to June 2020, those trading volumes rose more than 300%.

Rise of the Dollar

During the Covid pandemic, most traders – new and long-time investors – shifted their priorities to trading with the US dollar. The reason is that even in the past, the US dollar has tended to close the volatility gap, meaning there was little price change even during past market shakes.

This entails several other reasons. First, the US currency is deemed the most liquid, meaning you can easily buy/sell for around the same price. Second, the US economy is more internally oriented, meaning that, unlike Europe, the US conducts most of its economy within the borders of the federation.

In March 2020 (the beginning of the Coronavirus pandemic), the dollar index had a significant fall – a downturn that continued to follow in 2021. At the time, the EUR/USD pair – the most common one – marked a similar decline, although it quickly regained momentum.

Interestingly, today, this currency pair is at its lowest point, meaning that after 20 years, the price of the euro is the same as a dollar (1:1).

Fluctuation of Other Currencies

Aside from the euro and the US dollar, many other coins changed during these years. The New Zealand and the Australian dollars were also exposed to the shock. According to a study conducted on the effects the Covid pandemic had on the forex market, the AUD had the highest multifractality.

This led the AUD (with the EUR and JPY) to decrease, while other currencies like the CAD and GBP faced a slight improvement. Nevertheless, the GBP/USD pair reached its lowest point in March 2020.

The Russian ruble was one coin that suffered significantly. Its value against the US dollar changed by around 16% in March 2020.

Shaking up the Global Economy

The Covid-19 pandemic caught the world by surprise, leading to significant turbulence in the global economy. In hopes of stabilizing the turmoil, central banks acted in various ways.

In particular, the Federal Reserve was the first to start taking action by cutting 150 points on rates. Following suit, many other banks have either taken the same approach or have pumped liquidity into the market.

Naturally, these actions significantly impacted the overall forex market.

What Have We Learned?

The Covid pandemic impacted everyone – from individual businesses and lives to whole markets. The currency exchange is just one of the types affected by the changes brought about by the pandemic.

The equities market underwent a significant fall, and many investors started pulling out, afraid of the possible risks that might continue to arise. Some indexes at the time (March 2020), like the FTSE 100 index, reached their lowest point.

Today, the forex market is slowly coming back to its previous glory. Although the world is still in, what’s deemed one of the last phases of the pandemic, the FX market is proving able to withstand the Covid-19 pandemic.

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