While most developed and emerging economies may be repaying the socio-economic cost of coronavirus for a considerable period of time, the IMF has tentatively reported an increase in global economic activity as international lockdown measures are eased.
Sure, subsequent spikes in infections and localised outbreaks can still set the economic recovery back further, but it’s also interesting to observe how various geopolitical and macroeconomic factors have impacted on currency valuations over the course of the last six months.
We’ll explore this further below, while appraising the primary metrics that impact on the foreign exchange across the globe.
After a slight decline in the value of the US dollar during Q1, the greenback was seen to rebound significantly in May and June.
This was primarily inspired by record breaking job creation and better-than-expected non-farm payroll throughout the second quarter, which also enabled the rate of unemployment in the states to reach 11.1% at the end of June.
June also recorded the most striking employment figures overall, as non-farm payrolls soared by 4.8 million during this time, with this figure delivered against a Dow Jones forecasted 2.9 million increase in job opportunities in North America.
Make no mistake; there’s a clear and inextricable link between a nation’s employment data and its currency value, with positive news indicative of a healthy economy and capable of driving increased economic sentiment.
Interest Rates and Inflation
There’s no doubt that the coronavirus has had a detrimental impact on the practice of forex trading, and this is largely thanks to the way in which central banks mandate monetary policy and supply during times of economic austerity.
This has come under considerable focus during the coronavirus pandemic, when a host of developed and emerging nations have imposed quantitative easing measures to stimulate economic growth and activity. The UK offers a relevant case in point, as the Bank of England has slashed the base interest rate from 0.75% to 0.1% over the course of the last two quarters.
However, a reduced interest rate has a dramatic impact on domestic currency values, as it makes assets considerably less appealing to foreign investors and reduces the amount of capital inflows into a country over time.
Interestingly, this can also drive increases in inflation and the cost of living, which can in turn weaken currency values further.
On a similar note, anyone who has ever engaged in forex trading knows that a nation’s GDP is a key metric that can help to drive more informed decision making.
The GDP (or Gross Domestic Product) refers to the total market value of all goods and services produced in a particular nation, and a higher rate tends to be indicative of a growing economy that will set inflated rates of interest.
Conversely, a low or declining GDP tells the story of a contracting economy, and one that may see interest rates (and subsequently currency values) depreciate as part of economic stimulus measures.
This is why forex traders often monitor GPD performance as part of their analysis, particularly when dealing in major currencies such as the USD and the Euro.