Understanding the Impact of Global Political Events on Forex Markets

When it comes to trading with currencies in the forex market, political factors may often have a profound impact. The forex market, unlike other markets such as the stock market, which tends to operate purely on the availability of data such as GDP or corporate earnings statements, is very much influenced by political events. Whether it is an election, conflict surrounding a particular trade product or a change of government policy, traders know that such events lead to a tremendous amount of volatility that has to be worked around.

The first great way that political events can affect the forex markets involves the perception of risk. It also seems that when the level of political risk increases, investors act more carefully. For instance, if a country is experiencing some political threats such as civil unrest, political crisis, change in leadership, or strained diplomatic relations between nations, it leads to uncertainty. It is usually during such situations that returns on the risk are adjusted as the investors shift their dimes from the risky assets to safer ones. This means owning currencies of countries considered to be more stable may become rewarding, while those from unstable nations may drastically lose value.

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For instance, what does it mean when there is a national election in a country? This is always the case in a political election, especially a closely contested one that could cause a change of government. Business people may prepare for the changes in the current currency markets awaiting details of a new government. Market sentiment, often encouraged by some new political decision such as a change in tariffs or regulation, may cause shifts in currency values in a single day. They tend to convey some information about changes in fiscal policy, interest rates or foreign relationships; all invaluable to currencies.

Trade and political relations between countries also play a central role in the determination of the forex market. For example, if two leading trading partners such as the US and China face a trade war, it will cause volatility of the two countries’ currencies. Political events such as trade wars, sanctions, and negotiations on trade liberalization affect the trade of currencies in the global market. Exchange reserves of countries having such conflicts may decline because of the efforts that investors use in an attempt to cover from the turbulent effects of the brewing conflict. On the other hand, countries which are not negatively affected with regards to these trade realities may find their currencies appreciating.

It can also be caused by political events in that information is released into the market at such a fast rate given today’s technological advancement in information communication technology. As is customary with any news, they spread like wildfire and in the forex markets where a lot of trading takes place, traders have to be quick in their decisions. Actions, such as a decision made by a central bank or the introduction of unexpected regulations are things that can lead to immediate changes in the valuation of currencies which are watched keenly. Diplomatic activities that may be watched keenly might equally cause quick changes in currencies. This makes it even more important for a forex broker and trader to keep abreast with the happenings in the global political arena.

For a forex broker, it is vital to have an insight regarding the politics and the forex market. Those who cover the political risk environment and who have mechanisms in place to respond to such changes faster than their competition, can better advise theirs. They can also put in place measures for example risk management instruments in order to assist the traders when there is a lot of risk around.

Politics will always remain a key factor in influencing forex markets, and this we have seen can be powerful. By being aware of these shifts, brokers/traders are in a better position to adequately harness and respond to the opportunities that exist within a politically charged environment of the global community.