The Covid-19 pandemic and the ensuing lockdowns had a dramatic impact on almost all financial markets, not least of all the forex market. Foreign exchange rates were reportedly negatively affected due to the pandemic’s impact on certain countries. In fact, it was even reported that the “pandemic has severely impaired the functioning of the FX markets”. Financial sentiment surrounding the US and Chinese economies also appeared to increase volatility in the forex market. In 2021, currency markets showed some signs of risk aversion which were said to have continued in 2022. As we move on from the pandemic, let’s explore how residual pandemic related issues may continue to impact forex trading going forward.
Global economic recovery
According to a July 2023 IMF article, “the global economy continues to recover from the pandemic". The COVID-19 health crisis is officially over, and supply-chain disruptions have returned to pre-pandemic levels. Economic activity in the first quarter of the year proved resilient, despite the challenging environment, amid surprisingly strong labor markets.”
World economies have undoubtedly been impacted by the pandemic, and today, continue to work on recovery efforts. A large component of this has been central bank policies which seek to accelerate this recovery. Consequently, forex traders must remain vigilant in their monitoring of economic releases, interest rates, and central bank decisions.
Disruptions in the financial markets
The Covid-19 pandemic caused major disruptions in global financial markets, not least of all the forex market. In fact, a pandemic of this scale qualified as a macroeconomic shock, impacting foreign exchange volatility significantly. This saw sharp price swings and sudden changes in market sentiment. Notably, the Swiss franc was said to have served as a better safe haven asset than the US dollar, with the latter hitting some considerable highs and lows furing this period. While volatility is inherent to forex trading, it may continue to present some heightened concern as uncertainty remains regarding the long-term economic impact of the pandemic.
Global inflation rates
According to an IMF Working Paper dated December 2022, the world economy was “amid the worst inflation pressure since the 1970s due to a plethora of unprecedented developments. Global inflation has soared to 7.5 percent as of August 2022, from 3.4 percent in 2020 and an average of 2.1 percent during the period 2010-2020. The extent and pace of this surge are not just a recurring problem in developing countries, but it is also becoming an entrenched phenomenon across the world, including in advanced economies with a long history of low and stable inflation.” The paper went on to report that, “Global factors continue to play an essential role in shaping inflation dynamics throughout Europe, but domestic factors, including monetary and fiscal policy responses to the crisis, have become more prominent after the pandemic. Inflation is a complex phenomenon, with multitudes of domestic and external factors having direct and indirect influences on pricing behavior.”
By April 2023, IMF reported that, “Global headline inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the back of lower commodity prices but underlying (core) inflation is likely to decline more slowly. Inflation’s return to target is unlikely before 2025 in most cases”.
As the global economy stabilizes, central banks may shift their policies to address inflation concerns. These shifts can affect currency values and forex trading performance so staying ahead of any new developments is important for a trader to be able to react accordingly.
Increasing technological advancements
The Covid-19 pandemic accelerated the adoption of online trading platforms and tools. This was to make it easier for traders to access the forex market from anywhere in the world, internet connectivity permitted. This trend is said likely to continue in the post-pandemic world, with new advancements in technology playing an even more significant role in forex trading. Notably, the pandemic has also resulted in a major move from on-site work to remote or hybrid working arrangements. For traders worldwide, the increased flexibility and ability to work from anywhere has made access into financial markets operating in different time zones far more convenient.
A focus on risk management tools
Risk management in forex trading remains important in a post-pandemic world. As global financial markets continue to experience uncertainties and volatilities, the potential for gains as well as substantial losses still exists. Traders continue to adopt risk management techniques like stop-loss and take-profit orders to safeguard their funds. They also implement strategies like portfolio diversification and position sizing to protect their capital.
Looking ahead
In a post-pandemic world, forex trading remains a popular means for generating gains, despite the risks attributed to this activity. Traders must continue to adapt to ongoing shifts in market conditions, and monitor key news releases, be these scheduled (economic) or unanticipated (economic and/or geopolitical). A tool that would assist in this endevour is an Economic Calendar to stay informed about important announcements. Furthermore, traders should implement prudent risk management strategies in order to optimise trade performance and hold onto their money. Additionally, ongoing learning remains vital for both experienced and novice traders. It provides a means for staying ahead of all trading related trends and developments, and enables one to continuously refine their skills for more successful trading outcomes.
