500investments review top FX pairs of 2020

It has been an active year for FX traders and with higher volatility, plenty of new opportunities emerged. The pandemic-induced economic contraction sparked massive fiscal and monetary stimulus, putting pressure on currencies. A dollar spike followed by devaluation has been the leading fundamental driver of flows and that is why 500investments would like to review some of the top FX pairs of 2020, as well as a brief forecast for what might happen heading into 2021.

2020 – volatility returns to the FX market

Following the 2008 financial crisis, the unprecedented interventions in major central banks managed to suppress FX volatility. Now, however. The situation is completely different when compared to the early 2000s’. The abundance of liquidity pushed daily volumes above $6 trillion and forex traders were forced to move toward lower-liquidity minor or exotic pairs. However, 2020 revived volatility across some of the most popular currency pairs, which are among the top FX assets for the year.

What are the top FX pairs of the year?

EURUSD

Still the most popular currency pair in the world, the EURUSD has had an impressive ride in 2020. Even though the March dollar funding squeeze pushed the quote from $1.14 to $1.06 within days, aggressive actions from the Fed influenced the market sentiment substantially. By mid-July, the losses were already recovered and once the break above the March high occurred, EURUSD continued towards 1.20 without any major backlash along the way.

There has been some consolidation until the US presidential election was over, but once the event was in the back mirror, the Euro started to trend higher again, currently trading above $1.20 for the first time since April 2018.

Source: TradingView

From a technical point of view, the order is tilted toward the buy-side, which means the pair could continue toward $1.25 or $1.30. FX traders would also need to keep track of fundamentals. The EU is facing its worst recession in decades and because of that, the ECB will very likely start easing more aggressively next year. A weaker Euro is a major benefit, considering most of the EU countries run trade surpluses.

GBPUSD

Even though it did not manage to break above the September high, Cable (GBPUSD) did manage to erase the March losses, riding on the back of US dollar weakness. The recovery has been uneven and more volatile, given the Brexit uncertainty on top of the Coronavirus pandemic and the economic crisis. This is another currency pair part of the 500investments trading offer and due to high liquidity and tight spreads, there are plenty of retail traders heavily involved in GBPUSD.

Source: TradingView

As the above weekly chart shows the price is trading around a key resistance area formed around 1.33-1.34. It goes back to September 2018 and thus far, buyers have been unable to break above it.

A Brexit deal needs to be reached by December 31^st and based on the ongoing negotiations, the direction of Cable will become more obvious. A weekly close above the resistance area highlighted on the chart will be a sign buyers are gaining momentum. Just like the EU, the UK will also need a weaker currency to get past economic hurdles, which is why traders should monitor how the BoE will adjust monetary policy next year.

AUDUSD

Aussie dropped to 0.55 by mid-March, but what followed took everyone by surprise, considering the pair is trading in positive territory for the past year. Technicals have been holding well, with plenty of trading opportunities emerging along the way.

Source: TradingView

The most notable areas are 0.70 and 0.66 (both major supports) combined with 0.74 and 0.78 (critical resistance zones). At the time of writing, the price is hovering around 0.74, posting what looks like a pre-breakout formation. 500investments believes AUDUSD can continue higher heading into 2021 as long as dollar weakness will sustain an elevated risk sentiment.

Another fundamental factor to watch out for is the rising conflict between Australia and China. This should put pressure on Aussie if further escalations follow between the nations. On the positive side, the country can keep the COVID-19 under control, thanks to its geographical location.

Final Thoughts

Based on the current market conditions, 2021 is shaping up to be another active year in the FX market. Vaccine developments might put an end to the pandemic, but the world will need to deal with the effects of the economic backlash.

The combination of low inflation, high unemployment, and rising defaults in the private sector will continue to incentivize fiscal and monetary interventions. As long as this is enough to keep everything from falling apart, the US dollar will remain subdued, favoring currencies such as the Euro, Pound, Australian Dollar, or Canadian Dollar.

By Taylor Wilman