What exactly went wrong?
The euro began trading on 4th January 1999 at $1.16 and since its inception has seen a plethora of fluctuations which couldn’t have been predicted by the best of economists. With world events, political uncertainty and acts of terrorism all contributing factors to the instability of the euro, what does the future now hold for one of the world’s most used currencies?
Twenty years on, the anniversary year of the euro has brought with it multiple challenges as the currency plummets and remains vulnerable in the wake of Brexit uncertainty and slowing economic growth. During its existence the euro has fluctuated with events such as the 9/11 terror attacks, the UK’s 2016 Brexit referendum and the European debt crisis all having a negative impact, the lowest being after 9/11 when the rate dropped to just $0.8225.
The eurozone economy has been hugely hit by a decline in trade and another global recession could be in the cards for 2020 as even Germany, Europe’s largest economy is showing signs of slowing in the wake of the China-US trade deal saga. The US trade war with China has taken its toll on the eurozone and growth has been impacted bringing with it job losses and reduced production.
FX traders are also feeling the impact of the euro’s decline and will be looking to future eurozone stats for guidance as political uncertainty brings with it great concern. Elections can cause volatility in a nations currency and this can be even greater if they are unplanned. Investors have little motivation to buy the euro and a no deal Brexit could exacerbate this and make it a riskier currency to trade.
But surely it’s not all bad?
A weak euro isn’t all doom and gloom and there are some advantages like an increase in trade which can result in more jobs, increased sales and profit margins. A weaker national currency means exports remain competitive which has come to fruition in the French economy as it manages to keep its head above water as its less dependent on exports.
Tourists to the EU will also benefit as the lower rate means they’ll get more for their money, so the travel industry could receive a boost and see an increase as more tourists head over to Europe while the euro is in their favour.
Setting course for warmer climes?
So, where does this leave the euro in 2020? Has the euro reached rock bottom? Experts predict that the euro could fall lower with the uncertainty of Brexit. After the UK referendum the euro dropped to $1.11 and as political uncertainly continues in the UK, it is unknown how strong the impact of their exit from Europe will be and to what extent this will affect the euro long term. The prospect of a no deal would certainly hit the euro the hardest but with this now looking less likely the impact may be softer.
Another factor to take into consideration is the effect of Mario Draghi’s departure from the ECB. Mario left his position as President of the ECB after his eight-year tenure which saw dramatic times for the euro which Mario was said to have rescued during his time in office. As he leaves Christine Lagarde, former managing director of the International Monetary Fund, to take the reins; she has a difficult job ahead of her in in this struggling eurozone and critics watch with interest to see if she can save the struggling economy and make waves to recover the euro.
The US-China trade war could also have far reaching consequences if a swift resolution doesn’t come to fruition any time soon. The conflict is limiting growth in the eurozone but could also offer export opportunities in the future if China downscales trade with the US.
How can traders prepare?
There is a lot to take into consideration for FX traders and they will need to keep a keen eye on the eurozone stats and monitor volatility in the currency market which in 2020 will mainly stem from geopolitical turmoil.
As I’m sure you’re aware, recent data from the Bank for International Settlements (BIS) showed a 30% increase in daily trading volumes to a record of $6.6 trillion compared to its previous volumes of $ 5.1 trillion recorded in 2016. This statistic takes on more meaning when you view London’s share of global daily forex turnover which reached new heights at 43% up from 37% in 2016. This shows that despite all the uncertainty around Brexit, London remains dominant in this arena and continues to grow.
Financial services firms need to ensure that their trading operations are up-to-date and using the latest cutting-edge technology. For over two decades, TNS has supplied mission critical services highly tailored to the financial community’s unique needs and was one of the world’s first organizations to offer the industry a secure, dedicated, low latency network. Now with our acquisition of R2G and NetXpress we have strengthened our product portfolio and have become a unique single-source managed infrastructure provider focused on the demanding needs of financial market participants.
These combined strengths will broaden our offerings enabling foreign exchange firms to trade more dynamically by deploying a fully managed, ultra-low low latency infrastructure which is optimized for the foreign exchange industry.
TNSXpress delivers Layer 1 switch architecture with ultra-low latency as low as 5ns-85ns, global multicast market data from the world’s major exchanges and unsurpassed, high-touch customer service and support. This is crucial for traders in order to be prepared for market changes and will give them the competitive advantage required for their trading strategies. The Layer 1 revolution is just beginning and is one of a number of major disruptors which will impact the foreign exchange markets in 2020.
As for the future of Euro, the stage is set for an interesting and dynamic 2020 and it will be the trading firms seeking ultra-low latency that stand to gain most competitive advantage from the currency’s potential highs and lows.
Tom Lazenga is the Global Head of Sales for TNS’ Financial Services business and is tasked with setting strategy and driving growth. He can be contacted on firstname.lastname@example.org.