2020 was a year of surprises. While we move forward in 2021, the world is simultaneously facing two unseen crisis. First, the need to renew the finances in the public sector. Second, the need to deal with the climate changes, speeding up the transfer to renewable energy sources and transition of the world economy to a more sustainable path.
Merging in terms of strengthening the positions of the domestic market would make sense for many banks given that they are still segmented, whereby a number of small banks do not have economy of scale in order to compete efficiently, and keep, at the same time, the profitability and make the necessary investments in technology.
The European Central Bank remained unaltered the monetary policy at the first meeting in year 2021, after expanding its Pandemic Emergency Purchase Program (PEPP) for another 500 billion Euros and continued it until March 2022. However, the investors see that the central bank is reiterating its effort to adjust the policy as and when needed, leaving the door open for further stimuli, under circumstances of increased infections and new blockages. Given that many analysts project higher instability in the coming months, traders have to ensure to keep up with all the current issues, and thus, the positive impacts from the stimulating package are remain to be seen in the coming period.
While ECB should be in state of rest in the coming months, it shall probably be focused on its recently announced review on strategy for stimulating the openness, strengths and durability of the EU economic and financial system in the years to come. This strategy is intended to provide a leading role to Europe in the global economic management and enable good functioning of the international financial markets and multilateral system based on rules.
Many central banks keep the interest rates close to zero or a bit negative. While the Bank of England and the Bank of New Zealand threaten to bring the rates into negative territory, most of the central banks and policy creators would like to convince the investors that the economies are getting back to the real path and that the inflation shall return to the more normal level, as is 2,6% in the USA and below, but close to 2% in the Eurozone. Lower real interest rates and weaker currencies are the desired outcome of the policy in the early phases of recovery.
What is to be expected at FX markets in year 2021?
In year 2021 the FX market shall probably bring higher instability. Market attention shall be directed toward the destiny of the USD which might fall under high pressure. Currencies related with goods, as are the USD and the Canadian Dollar, may enjoy higher support if the goods demand continues to grow along with the economy. It shall be very interesting to see if the GBP shall be able to continue and keep its upward trend after UK reached trading agreement with the EU. For the EUR, it may be another year of strength relative to the USD despite of the recent problems of the European economy.
This year, the foreign exchange shall probably be initiated from how fast the confidence in what we believe to be post pandemic global recovery is renewed. In Europe, policy creators deal with the deflation impact and return of economies to the pre – COVID 19 level, which is making them less tolerable to the strong EUR. It is expected that there will be a move of precaution at the developing markets in year 2021, thus keeping the USD weak to EUR/USD to 1.2500.
Although ECB might be disappointed from the recent increase of the value of the EUR, that shall make higher pressure on the economic growth, little may be done to stop the EUR of moving higher. It does not surprise that because of the global and mutual interconnection of the exchange market, developments from all parts of the world may have immediate consequences over the foreign market and currency values.
Trading crafts are expected to be popular in year 2021. This is a trading strategy which includes borrowing with low interest rate and investing in asset which provides higher return rate. This should lead to lower levels of movable instability of the foreign exchange. Highest real interest rates are usually the developing currencies, including Vietnam and Egypt. This is also one of the factors which might increase EUR/USD higher in year 2021.
Seeing in 2021, the EUR is expected to continue marching higher, supported by the global recovery, increase of demand for its export and capitalization of considerably weaker USD. Unfortunately, this assessment might be too optimistic.
Thus, in year 2021, the world shall continue to fight against spreading of the Corona virus. The only difference is that it shall not be a new challenge and something unknown. The virus is a known enemy already. In any event, year 2021 shall most probably be a year full of shocks, risks, huge jumps, roller coasters and other unpredictable issues. This is a historic time period that shall be remembered centuries later.