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How Does Politics Affect the Forex Market?

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Foreign exchange (forex) trading is a truly global marketplace, growing ever more popular as a way to make money. In order to successfully trade currency, it is necessary to be aware of the ebb and flow of the global markets and to stay abreast of developments that may affect the relative value of currencies.

There are many factors that affect the forex market, and as well as purely economic, data traders are on the lookout for political upheaval, natural disasters or positive events such as major sports tournaments. These macroeconomic events are more important to be aware of than ever, due to the global and fluctuating nature of forex trading.

Political factors

Political turmoil profoundly affects currency prices. Major political changes, such as Brexit, can cause a country’s currency to plummet in value, as uncertainty and confusion affect markets. Elections are events that occur in the majority of countries in the world and can cause currency rates to become volatile. Again, this is due to uncertainty and instability, especially in a country with regular political upheaval.

A good rule of thumb for a forex trader is to keep an eye on the exit polls and assess the likely political and economic implications of one leader or party over the other. Countries such as Israel have political parties with radically different ideologies, and as they have a system of proportional representation, coalition governments often have to be formed between major centrist parties and those on the fringes.

Differing ideologies often boil down to different approaches to the economy, and if an incumbent leader is likely to be ousted, the country’s currency is likely to devalue, even if the incoming government’s fiscal policy is one of growth.

How to read the forex market

It is important to be well-informed about events happening around the world. Beyond the financial news, take time to read about politics, socio-economic situations, and upcoming events. Market analysis is a crucial part of being a successful forex trader, but sometimes, in a particularly uncertain situation, it may be prudent to enlist the help of a broker.

There are many resources online, designed specifically to allow you to compare brokers, to pair you up with one with the most expertise in market analytics and trading signals, and who should be able to help you navigate choppy political waters.

When there are upcoming elections, be sure to read up on who is on the ballot and who is likely to win – and the potential political and economic fallout. Although nothing is certain in either politics or forex trading, staying informed is essential.

Natural disasters

Large scale natural disasters, such as the Japanese earthquake and tsunami of 2011 are catastrophic events for a country and its economy. The loss of human life, destruction of property both residential and commercial, and the sense of despair among survivors all negatively affect the value of the nation’s currency.

Worse still, the damage to industry and infrastructure, loss of tourism, and loss of workforce personnel mean that it can take years for the economy to recover. When a country is spending money on repairs rather than growth, it is bad news for currency rates. And it becomes a vicious circle, with less consumer spending as the economy suffers.

War

War affects a country’s economy like nothing else. All resources are poured into it, infrastructure is destroyed, people are displaced or lose their lives. The enormous volatility and uncertainty surrounding a war also radically devalue the currencies of the countries involved (or the country, if it’s a civil war). Again, the rebuilding process after a war can be lengthy, and the total loss of industries such as tourism can take its toll on the economy. At the same time, an economy can be boosted by war, propping up heavy industry and production.

The value of a country’s currency is determined by economic strength, which is affected by all macroeconomic events. As a forex trader, it is important to try to anticipate any political eventuality which will lead to a rise or fall in currency values – even though the world is a highly unpredictable place.