Forex is one of the world’s biggest markets where you can trade currency pairs from every corner of the world. Capital.com offers access to more than 160 forex pairs via contracts for difference (CFDs), but which ones should you add to your portfolio?
This article breaks down the best currency pairs to trade with the latest market analysis and projections to help you go where the action is.
Without further ado, here is our list of the top 5 forex pairs to trade in February 2021.
For the best currencies to trade, it may seem a bit obvious to start with the world’s most highly-traded ones. However, now is a crucial time for both currencies.
EUR/USD endured a rollercoaster ride in 2020 as the greenback rallied hard at the onset of the coronavirus pandemic when financial markets rushed to safe havens and liquidity.
This move then reversed as markets started to question the future of the US dollar due to the devaluation caused by the Federal Reserve’s stimulus measures. This caused big gains in commodities and non-dollar currencies. Billionaire investor and hedge fund founder Ray Dalio has previously warned of threats to the dollar’s status as the world’s reserve currency because of the current trends.
The dollar was weakened further as former President Trump left the White House and this saw a Democrat President moving in. The current administration is now putting the finishing touches to another stimulus package of $1.9tr, and it also has big plans for green spending.
In financial markets, the steeper a trend gets, the more dangerous it can be to follow. Investors were warned of this last week amid the GameStop saga. For the dollar, the recent slump and talk of the currency’s demise meant it was due to see a bounce and this has emerged over the last weeks after a high in the EUR/USD near 1.2400. The pair has since slipped to 1.2105.
The reason this is a crossroads for the EUR to USD rate is the potential for a 4-500 pip move up or down. This will depend on whether the latest bounce in the dollar is a pause in the longer-term trend, or whether the economy can bounce back more quickly than its European counterparts.
Last week’s news didn’t fully support the greenback but the currency still advanced. The latest weekly jobless claims number showed unemployment in the US was lower for a third-straight week. This gave investors hope for a big employment number on Friday, but the result was disappointing with the number coming in at 49,000 versus 50,000 expected. Despite this, the unemployment rate was still lower and traders took this as a positive.
In the Eurozone, GDP updates for Spain and France were slightly better, while the bloc saw inflation rising for the first time in months with a jump to 0.9 per cent. This was a key development as the European Central Bank had threatened to intervene in the rate and push the euro lower to take the pressure off exports.
For near-term trading, the US dollar could move to 1.1600 if it can see a catalyst to get through the 1.2000 level. One of these could be in the economic numbers, but there is also the fact that the USD was beaten down badly in 2020 and could look to mount a stronger recovery.
Another currency to watch is USD/CAD because of the move in oil towards $60 per barrel. This has boosted the Canadian dollar, but if there is any obstacle to the reopening of the economies, such as a virus mutation, oil could get hit, while investors would look for safety in the USD. This would be doubly bearish for the CAD, which could make USD/CAD one of the more volatile forex pairs.
USD/CAD trades at 1.2730 and the key scenario will be whether the USD can get back above 1.3000 if a bounce does emerge. The Canadian currency could make a push for 1.2000 if greenback selling continues.
EUR/GBP is another currency to follow in February due to the pound’s recovery in January. GBP was another currency that struggled in 2020 through a mix of Brexit risk and virus headlines.
Once the Brexit agreement was signed at the end of the year, the UK was heading into another lockdown and this saw the currency struggling for real gains. The turning point for the UK has come from the country’s vaccination programme. The country is moving ahead faster than other developed nations and more importantly for the EUR/GBP pair, faster than the Eurozone.
The government in Britain has now administered almost 12 million shots of the vaccine to its citizens and this amounts to around 17 per cent of the population. The Eurozone is trailing behind this pace and recent delays by drug makers Pfizer (PFE) and AstraZeneca (AZN) saw the EU criticised and caught up in a row with the firms.
On economics, the Bank of England held its key interest rate steady at 0.1 per cent last week and declined any further stimulus measures in the short term. This was accompanied by bullish forecasts for a strong rebound in the second quarter due to the vaccine rollout. The situation could now see the British economy open up before the European nations and that could see a bigger move in the UK currency.
The EUR/GBP pair now trades at 0.8765 after recent gains but the pair traded at 0.7000 before the Brexit referendum. Both parties have followed the same monetary path of low rates and stimulus so there is still value in the pound. Some have a gloomy outlook for the British pound but if the economy powers forward on vaccines then the currency could move closer to its previous valuation.
GBP/CHF will be an interesting pair due to the gains seen in Switzerland’s currency. The safe haven status of the country saw an anti-pound move like the EUR/GBP, but on steroids. The pair traded around the 1.5500 level in early 2016 but fell to lows near 1.1500. The pound is currently trying to carve out a price bottom and this will be a currency to follow the pound vs euro recovery theme, but also to play the UK as a safe haven in its own right now that it has left the European Union.
USD/NOK is another place to go for the oil recovery play, but in a country that is more politically stable. Norway’s economy is more rigid and the government isn't prone to making rash moves. One risk for oil is the move towards green spending but that is a longer-term theme. In February, the market will look for the USD bounce vs oil highs theme.
You can find out how to trade forex with our comprehensive guide. Once you decide what forex pairs to trade this month, create an account at Capital.com and follow our coverage of the latest developments to spot the best trading opportunities.
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.