Australian Dollar
The Australian dollar is expected to end 2020 on a strong note. The main reason for this strength is the recent strength in the commodities segment, especially in the iron ore market.
Reserve Bank of Australia’s dovish policy had little impact on AUD / USD because other central banks were also dovish.
The market consensus is that interest rates in developed countries will remain low for years to come, so the Reserve Bank of Australia may have the opportunity to put more pressure on bond yields without harming the Australian dollar.
This year, Australia’s relations with its main trading partner, China, have worsened, but their interdependence is strong enough to prevent a serious deterioration in their relations. I don’t expect big risks on this front.
Currently, the outlook for the Australian dollar is high, but its future trajectory will depend on the continuation of the high in the commodities segment.
British Pound
The EU and the UK have just negotiated the Brexit trade deal, so the main risk for GBP / USD has not been realized.
In the past few months, GBP / USD has risen with traders betting on the success of Brexit trades (and those bets have paid off), but now GBP / USD traders will have to find additional reasons to be optimistic about the pound.
The UK is currently struggling to contain the new coronavirus strain, which could put additional pressure on the country’s economy. In addition, the economy may take a Brexit coup, although the size of the coup is not as serious as in the case of a non-deal Brexit.
The fundamental situation looks challenging for the UK economy in the first half of 2021, which could put some pressure on the GBP / USD, which needs additional bullish catalysts after the end of Brexit trading. Although the pound may have more room to run, GBP / USD bulls are likely to need some help due to the general weakness of the US dollar.
Canadian dollar
Like other large central banks, the Bank of Canada will be forced to provide material support to the economy until inflation shows some signs of life. Canada is also suffering from the second wave of the virus, although the situation stabilized in December. It remains to be seen whether this second wave will put additional pressure on the Canadian economy.
Oil price dynamics will continue to be an important catalyst for USD / CAD in 2021. If WTI oil manages to settle above the $ 50 level and gain more momentum, currencies related to commodities like the Canadian dollar will receive an additional boost.
At this point, the outlook for the Canadian dollar looks favorable. The main risk for Canadian dollar bulls is the sudden general strength of the US dollar.
Euro
The European currency showed material strength later this year. In recent years, the EUR / USD has been under pressure due to the European Central Bank’s dovish policy and disappointing growth rates in the Euro Area.
However, the pandemic has provided significant support for the euro as traders have turned their attention to the problems of the US dollar. In 2021, the main question for EUR / USD is whether it will be able to set itself above the 2018 highs at 1.2500.
While the ECB may be disappointed by the recent rise in the value of the euro, which will put further pressure on economic growth, there is little it can do to prevent the euro from rising.
The interest rate is already bottoming out, the asset purchase program is working, and while the ECB likes to reiterate that it has not run out of options to support the economy, there are limits to the power of any central bank.
Traders know this, so EUR / USD bulls will likely try to test new highs in early 2021. If this initial test shows that demand for the euro remains high, EUR / USD will have a good chance of developing a strong upward trend in against the US dollar next year.
Conclusion
This year was very interesting for foreign exchange market traders, and next year is likely to bring more volatility.
The market’s attention will be on the fate of the US dollar, which could be under more pressure if the Fed continues to print money while the world economy recovers from the pandemic blow.
Commodity-related currencies, such as the Australian dollar and the Canadian dollar, may have more support if demand for commodities continues to grow along with the economy.
It will be very interesting to see if the British pound will be able to continue its bullish movement after Britain has successfully negotiated a trade agreement with the EU.
For the euro, it could be another year of strength against the US dollar, despite the current problems in the European economy.
For a look at all of today’s economic events, check out our economic calendar.