When it comes to financial markets, the forex market or foreign exchange market is one of the most active markets in the world. Investors from all over the world continuously engage in over $4 trillion worth of forex transactions. As a result, political events that may affect forex markets can have dire financial consequences.
Unlike other markets, the forex market is more globally (inter) connected. As a result, even the smallest event in a tiny corner of the world can have an immediate impact on currency values and exchange rates around the planet.
So let’s take a look at how some of the political events that can affect the currency markets.
A great example of political turmoil impacting international financial markets is Brexit. In late June, the United Kingdom voted itself out of the European Union. The negative impact of this decision was far-reaching. It even went beyond the forex markets to have an effect on stock markets around the world.
The Sterling Pound went on a free fall and it hasn’t recovered since then. As a result, one event had a large and lasting effect on the country’s currency. There haven’t been any signs of recovery as there’s still a lot of uncertainty as to how this is going work. Further, the political instability doesn’t make investors feel secure, so for the time being, the currency is down.
When a nation’s government changes, it usually means a change in ideology for its citizens. This means there might be a different approach to fiscal policy, trade, and the drivers of economic growth. All this directly impacts the currency’s value.
For example, if the new government that’s coming in is more socialist and not pro-economy, currency traders can quickly get nervous and sell off their currency rapidly. This will diminish the currency’s value.
Even before a government potentially changes, if there’s a decision made to hold unexpected elections, it can throw the foreign exchange markets into chaos. For example, imagine if a powerhouse like the United States of America made such a decision?
Regardless of the circumstances, whenever an event creates uncertainty, it will make investors nervous. As a result, forex markets will be affected.
So when you trade in foreign currency, you should follow what’s happening around the world. Although you might think it’s only necessary to follow the countries who’s currency you’re trading, you should also follow other nations as there might be trade agreements that will impact the currency you’re holding.