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Why are FX Volumes Dropping?

Why are FX Volumes Dropping

Forex volumes are not necessarily dropping as of right now, but they were dropped enough that the whole month of July was dedicated to recovering these numbers more than maintaining the status quo.

Financial experts raced to explain this phenomenon in any way they possibly could but were beaten to it by the recent surge in volumes. In months like April, May, and June foreign exchange volumes dropped exponentially, some experts saying that the slump was around 30% of the whole market.

But that would have been a lot more disastrous than we’ve been lead to believe. You see, the exchange rate of an overwhelming majority of currencies is solely dependant on the volume at which they are traded rather than a direct connection to their parent country’s economy. If the volumes had dropped so much we would have seen a surge in exchange rates for smaller currencies, while the USD, EUR, GBP, and many others would just trickle down the slippery slope.

But that most definitely has not happened, in contrast, the USD and other major currencies are as strong as ever, while the other, smaller currencies are deteriorating at a rapid pace. Why is that? Well, mostly because of the economic outlook and the safe haven theory.

Safe Haven Theory

According to many experts from different fields, especially Forex analysts from 55brokers, the United States Dollar as well as the Euro have always been a safe destination for fledgling investors trying to avoid a market crash.

Why is this? Well, mostly because even if there is a slump, these two currencies have the biggest potential of recovering first, and recovering fast. Furthermore, we could call the safe haven theory a self-fulfilling prophecy. If the majority of the FX market believes that the USD is going to survive the slump, then it is most definitely going to do so, as investor confidence increases, subsequently increasing demand while draining supply.

If we take a look at this Forextime review, it becomes quite obvious that most FX traders, be they retail or institutional are always trying to pair their trades with the USD, just to give themselves some falling-back space.

Furthermore, major currencies are much safer due to their liquidity compared to others. The USD, EUR, and other major currencies have a unique feature of always being in demand. This is usually because of smaller countries trying to regulate their own exchange rate, thus always having massive short or long trades of their foreign reserves.

This makes sure that whatever trade a retail trader places on these currencies, it’s always going to go through.

Judging by the remarks on numerous forex broker reviews, it’s painfully obvious why most companies encourage their customers to choose these specific currencies as their main target during peak market hours.

Economic outlook

As for the economic outlook, we can freely say that major currencies don’t necessarily consider it a very important factor in their exchange rates. Well, at least the largest ones like the USD and the EUR. For things like AUD, CAD and JPY this could definitely be a factor if the situation is dire, but for the United States and the European Union, things aren’t as black and white as they seem.

This is mostly due to the diversification of the economy in different parts of the world as well as the composition of different countries within the spectrum.

Overall, the main reason why FX volumes are dropping or have already dropped all over the world has to do with things like panic trading and consolidating capital in currencies like the USD and EUR. This mostly happened during the beginning of the pandemic, thus leaving the following months devoid of activity due to further concerns.

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