The foreign exchange or forex market is the biggest plus most active financial market in the world. Every day, participants from all over the international engage in trillions worth of foreign exchange transactions.1 Events from all corners of the globe can immediately affect exchange rates plus currency values due to the international interconnectedness of the forex marketplace.
Key Takeaways
-Global events can immediately affect exchange rates plus currency values due to the interconnectedness of the forex marketplace
-Much of a currency’s value derives from a country’s economic strength, plus uncertainty in economic forecasts typically does not work in a currency’s favor
-Political turmoil, natural disasters, plus war are just a few events that can have a profound effect on the currency markets
Political Impact on Currency Prices
A political election—a common event in almost every nation—can have a large impact on a country’s currency. Elections can be viewed by traders as an isolated case of potential political instability plus uncertainty, which typically equates to greater volatility in the value of a country’s currency. In most situations, forex participants will simply keep an eye on pre-election polls to get a sense of what to expect plus see if there will be any changes at the top. That’s because a change in government can mean a change in ideology for the country’s citizens, which usually equates to a different approach to monetary or fiscal policy, each serving as big drivers of a currency’s value.
Additionally, political parties or individuals who are seen as more fiscally responsible or concerned with promoting economic growth tend to boost a currency’s relative value. For instance, an incumbent who is seen as a “pro economy” that is in danger of losing their position of power may lead to currency drops for fears of limited future economic growth plus predictability.