The global foreign exchange market is the largest and most liquid in the world with a daily trading volume of around $6.6 trillion. In short, it’s a marketplace where investors, companies, and even governments buy and sell a particular currency against another. This can be done for many reasons such as the need to acquire another currency, business and purchasing, and, of course, investing. The value of each currency depends on a variety of factors such as the economy, social and political events, scandals, current affairs, and general trends.
2020 was a year that saw a record increase in the number of people trading on the forex market. Most of these were casual investors who previously knew nothing about forex trading. But, after asking, what is forex trading and how does it work, and by utilising online resources, they have entered the markets. They aimed to make a profit by taking advantage of a tumultuous year and swinging currency values. By combining this with newfound knowledge from various online resources, the foreign exchange market saw a 300% increase in new accounts over the year. But how did this impact UK-based traders or those looking to trade GBP/EUR pairs?
The performance of the GPB/EUR in 2020
To say that 2020 has been challenging for the GBP/EUR pair would be an understatement. Not only did the GBP have to fight off the impact of Brexit, but it then had to contend with the global pandemic. The GBP hit a yearly low of 0.8301 GBP on February 14 and registered its yearly high of 0.9427 on March 18. After that initial high, it dropped again throughout April and May before gradually increasing to a high point in mid-July. It registered another significant drop in August before remaining somewhat steady, but still low, through the autumn months. The average exchange against the Euro during 2020 was just 0.8897.
This year presented investors with several good opportunities for making a profit, depending on which way they speculated.
A bleak winter ahead
The rest of the winter months are expected to be somewhat uncertain with the exchange rate being driven by ongoing Brexit developments. As the GBP has fallen since the referendum to leave the EU, this combined with the chance of negative interest rates means we could see it drop even further. Additionally, as the UK struggles with a resurgence of Covid-19 cases, travel restrictions, and lockdowns, it may take some time for things to stabilise once more.
We saw the foreign exchange market become more volatile during 2020, in 2021, it will be an economic recovery that influences its potential. Interest rates, GDP output, employment statistics, and the terms of the deal with the EU will all have an impact on the next 12 months. While we are not out of the woods yet, there is hope on the horizon in the shape of the Covid-19 vaccine which is currently being rolled out country-wide.
However, for investors, it’s a somewhat bleak outlook with hopes of things picking up not likely to be realised before spring. Of course, success in forex trading depends on which way you are speculating. Savvy investors will follow the trends and invest in the optimum currency at the optimum time.
South vs North
There has always been a divide between the North and South of the UK – politically, socially, and economically. This has been further exacerbated by the economic circumstances of the last year. A recent report from EY noted that economies lying outside the south would be slower to recover than those in the south. Most would be smaller than their 2019 level, by 2023. In terms of employment, only the capital and the southeast would increase the number of those in employment during the same period.
Despite the North being home to much of the country’s manufacturing, it was regions such as the West Midlands, East Midlands, and Yorkshire and Humber that registered the biggest economic contraction. This slow recovery in industry-heavy parts of the country could have a knock-on impact on the strength of the GBP. If output and export levels are lower and fewer people are in work for longer, we can estimate that this will result in the pound strengthening at a slower rate.