The Forex market is one of the most active global marketplaces where anyone from anywhere in the world can trade anytime in the week from Monday to Friday. Everyday huge amount of currency trade happens in the Forex market where participants from all over the globe participate in the market. This makes the Forex market sensitive towards major economic and political events in the world.
Though other markets also get affected by the political and economic changes happens in the developed nations apart from the domestic developments but Forex market tends to respond on these events quite early and gives a massive movement if any unpredictable or unaccounted events happens in the political or economic front because of its interconnected nature which makes it a highly sensitive market for political and economic developments
In this blog, we will explain the most important political and economic events which affect the Forex market.
War and Currencies
War is never profitable in case of currency. Whenever a psychical war or a trade war hits it tends to impact the Forex market negatively and currencies tend to lose their value due to the tension created by the war.
Every war ends up with a huge loss of billions and it impacts the global economy drastically. Not only during the war but after the war ends the damage created by the war gives deep scars and it takes a lot of money to rebuild and restore the economy which requires finance and often many countries forced to offer cheap financing options which offer lower interest rates and thus it devalues the country’s currency which again impacts on the economy of that country.
In trade war both parties losses a lot not only the country or region which exports more but the importer country also looses as the domestic demand keeps its level the same but the shortage of supply increases the price of those goods which leads to an unexpected increase in the inflation numbers which will impact the domestic market big time as refueling all the demand and fulfilling them by domestic production takes a lots of time and it is not something which can happen overnight which deepens the demand and supply gap.
Also, a trade war impacts the global economy negatively and leaves a market on the global economic outlook as the parties involved in the war faces a slower growth which affects the global economic condition and it also decreases the demand of various goods which is supplied by and to the connected parties.
Political uncertainty and election Impact on Currency Market
Political uncertainty and elections play a very important role in the valuation of that country’s currency as the political uncertainty creates an elevated level of risk in the economy which leads to a downward pressure in the currency which leads to higher level of volatility and bearish movement in the value of that currency.
,on the other hand, affect the currency market differently depends on the type of situation the election is called. If there is an unexpected election because of some scandal or because of the nonconference vote or other political pressure then the market reacts on that negatively and that situation tends to put bearish pressure on the currency of that country and on the other side if the election is prescheduled and it is happening after the completion of the term then it does not impact the market as strongly as the unexpected election dose.
But in a normal election situation also the markets pay close attention to the pre-election votes and try to account for the upcoming result by analyzing those poles and votes in order to absorb increased volatility. In case of a result which is less expected by the market or a surprising result tends to affect the market deeply and it tends to give a short-term reaction in the currency market which leads to a higher level of volatility.
Elections are very important for the currency as the belief and stance of the new government towards monitory policy and fiscal policy plays a very important role in the valuation of that country’s currency. Also, the stance on international relations by the new government and plans on trade relations of that country is very important as that effects the import-export and trade deficit of that country which has a significant importance in the country’s economy.
Important economic reports of Major economies and there impact on the Currency Market
There are various economic reports of major economies which affects the Forex market especially the reports on fiscal and monitory policy plays a very important role in the valuation the currency. Economic reports related to employment, inflation, trade deficit and monitory and fiscal policy influence the movement in the currency market thus keeping a close track on the development in the economic development in the major economies helps the traders to read the market effectively
Being the biggest economy of the world the development in the U.S economy affect the world economic condition big time. Important reports related to the U.S economy tends to influence the market movement of currency market and the level of deviation from the expected or forecasted economic number decides the level of volatility created by that report in the currency market usually.
The Bottom Line
Political uncertainty, unexpected elections, and War tends to create an overall negative sentiment in the market where decision making becomes more challenging than the normal situation but Forex market gives us an advantage of converting those moments into profit by providing us plenty of liquidity and options to short the effective economies currency and going long on a much stable economy which makes this market an ideal choice in times of uncertainty. On the other hand, economic events and major economic reports come and shake the market time in time which also helps an informed investor to map the movement and trend of the market. By reading these important economic events and a trader can effectively translate the volatility created by these events into profits but it requires a deep study of market and economy.