XM -Blog
Home
The Landscape of the Foreign Exchange Market in 2020

The Landscape of the Foreign Exchange Market in 2020

March 17th, 2020

Last year was a turbulent time for financial markets but also a year of record-low volatility for the foreign exchange market. Political tension across different geographies and the fear of a global recession as the year progressed: these were just some of the things impacting every market.

The policies of central banks certainly minimised volatility. However, some commentators have said there was a wait-and-see approach due to the major economic and political events that have been unfolding over the past year. They also added the lack of movement in foreign exchange was merely the calm before the storm.

As 2019 came to a close, the exchange rate forecast for 2020 was for increased volatility against the same turbulent political and economic backdrop. However, crucially, what no one could have foreseen was the spread of the Coronavirus and its impact across all financial markets. 

Before discussing what the remainder of 2020 may bring, how does the foreign exchange market work?  What are the primary triggers and influences that dictate changing currency values? And what are some of the ways that foreign exchange affects us all?

Forex trading 2020
Also known as the currency exchange market, forex, or simply FX, the foreign exchange market trades currency pairs globally (for example, GB pounds and US dollars), with buyers and sellers currently trading more than five trillion dollars every working day. It is the world’s largest financial market, engaging a diverse range of players, such as institutional investors, banks, central banks, and family offices, all of whom are trying to profit from fluctuating values. Because the market trades round the clock, traders must carefully follow the foreign exchange market news and stay informed on world events.

Changes in foreign exchange market rates affect the relative values of the 180 currencies that make up the global currency exchange market, and we are all affected in many ways. For example, if you are a foreign national who sends money to your family in your homeland, you are making a forex trade. Equally, if you are travelling between countries and swap one currency for another, you are using the currency exchange market. Additionally, if you buy something that was made in another country, you will pay in your currency, and the manufacturer will be paid in another currency, meaning the transaction is part of the currency exchange market.

Factors shaping foreign exchange market rates
The forex marketplace is complex and the exchange rate forecast for 2020 hinges on a combination of factors, such as predictions for economic growth, political stability, monetary policy, imports and exports, and interest rates.

At the end of 2019, analysts were focusing on several key themes and drivers. Trade wars figured strongly, given that the currency exchange market has become such a globalised activity and is therefore subject to macroeconomic events.

Read: Factors Influencing Exchange Rates

The impact of Coronavirus
Many market participants expected a fairly calm first half of the year. How wrong they were. The Coronavirus is now the single most important global event and economic factor affecting financial markets, and it may have profound implications for the foreign exchange market during the rest of 2020.

We are already seeing a significant economic impact as supply chains are disrupted, and business continuity across all sectors is being threatened by measures to contain the spread of the virus. This will weaken the gross domestic product of some countries, which in turn will undermine market confidence in their currencies. The market reaction to Coronavirus will evolve in relation to its geographic and economic impact, with more vulnerable countries seeing their national currency fall in value relative to currencies in economies that are better able to withstand the fallout. The bottom line is that no one can predict the knock-on effects of the virus, which is an exceptional global event, thus confounding the exchange rate forecast for 2020.

Paying attention to foreign exchange market rates
The forex market and exchange rates are fundamental to international trade and investing. Without the ability to trade in different currencies, there would be no global business. And without different currency values fluctuating according to some of the factors described here, there would be no market for forex traders. Whether your business depends on imports and exports, or you are simply sending money to another country, the value of any transaction depends on market forces. 

The economic outlook for a country is the most crucial determinant of the value of its national currency. However, there is no failsafe formula for predicting the foreign exchange market. Many factors come into play, and as the Coronavirus amply demonstrates, some are highly unpredictable and can be game-changers.

Also Read: Save Money on Your Foreign Currency Exchange