How Does Politics Affect the Forex Market?  - XAUBOT

How Does Politics Affect the Forex Market? 

How Does Politics Affect the Forex Market? 

The forex market of the foreign exchange market is the biggest and most active financial market all over the world. It has attracted literally hundreds of thousands of traders to itself throughout its history and up to this point.

Being such a large scale global operation and committed endeavor of people from every single country, it is only natural that such a market would be affected by the events that transpire around the globe.

Among the events that can impact the foreign currency market, political events have a particular sharp landing on the runway of this market. In this article we want to see who political events can affect the forex market.

 

The Impact of Political Events on the Forex Market

In order to truly understand why and indeed how politics are able to impact the forex market, you need to first understand the fundamental notion behind the market itself.

The essence of forex is just that, the currencies. So whatever can impact the currencies of any country can ultimately impact the forex market just as well. And the currency of the fiat money of any country is the most accessible and the most direct means of interaction between every single individual in any society and the economy on a larger scale.

This is how the fiat currency of any country is at such a risk or rather such greatly exposed to outside forces and tensions. So it can be surmised just how many different types of events can influence this market. And political events simply cannot be overlooked among these factors.

And that is of course due to the sheer powerful and long reaching extent of any important political happening, especially those that go beyond their own country’s borders and whose consequences can be felt by more than their original country’s citizens.

So now that we understand a little bit more about the nature of the forex market and how it can be impacted by outside forces, especially politics, let’s see exactly what types of political events can manipulate this market so-to-speak.

 

Which Political Events Can Exert Influence on Currencies?

As far as forex is concerned, any political event large enough can potentially impact the market and the traders themselves.

For instance, an election is a political event that is most likely going to impact the foreign currencies and their exchange rates. The reason for this can be seen in how elections are perceived by people, especially by traders.

In essence, an election is a process that can potentially change a country’s entire financial policies. This means the largest macro scale of changes in the country’s financial and fiscal policies.

Policies such as spending, default rates, debt ceiling, mandatory spending, discretionary spending, etc. all of which can increase the value of a country’s currency or devalue it.

Of course in the matter of elections and their impact, the US election is clearly the most important as far as forex is regarded. The reason? Well, the reason is green. The US dollar of course.

The currency pairs that include the US dollar make up almost one third of all the trades that take place on the forex market on a daily basis. So this is why anything that can impact the US dollar, should be important and closely followed by forex traders.

Naturally, this would also include the US midterm elections for the US House of Representatives and the US Senate.

Which Political Events Can Exert Influence on Currencies? 

Which Political Events Can Exert Influence on Currencies?

But of course, elections in other countries are also crucially important. This is one of the reasons we see such a great degree of anticipation among traders whenever there is an important election going on somewhere in the world. Of course because the difference between a more financially conservative or a more financially liberal candidate can be quite different.

This is not to say which side of the political spectrum is more suitable for forex traders. Quite the opposite. This is to say that the outcome of elections is important because they could potentially create volatility in the price of a currency.

Note that we are not only talking about the monetary policies that are directly set by the government. Nor the fiscal policies set by central banks, which in many countries are themselves chosen by the new administration. In fact, we are talking about the political aspirations and orientation of the politicians as well.

We have seen many times when two countries clash with each other on the world stage and embargos follow, the country’s fiat currency can be subject to extremely huge changes.

This is what has happened with Venezuela or Cuba. Or more recently with the Russian Ruble following the almost unanimous global embargo over the Russia Ukraine War.

Policies, decisions, treaties, embargoes, etc. all are examples of politically motivated matters that can positively or, in most cases, negatively influence one or even more fiat currencies.

Now let us turn to the figures themselves, to see how politicians impact the exchange of foreign currencies.

 

How Do Political Figures Impact Forex?

First and foremost, political figures are measured with regard to their fiscal responsibility and the caliber of their financial policies. Certain politicians and even certain political parties have a financial orientation that if elected to power can result in laws and policies that could in turn impact the currency of a country.

Furthermore, high status political figures, such as renowned leaders and presidents of major nations, can manipulate the forex market with their words and speeches.

A hopeful address that reaffirms the confidence of leaders in the economy of the country can very help boost the value of that country’s currency to a certain degree.

On the other hand, a speech indicating doom and gloom on the financial front, can heavily impact various economic indicators and indices that are all used to evaluate the strengths of an economy’s currency.

 

Do Geopolitical Events Influence the Forex Market?

There are many different types of geopolitical events. Some are more related to politics and some less. But one particular event with huge geopolitical outcomes that is also heavily tied to politics, is war.

Men start wars as they say. Wars don’t start themselves. Take for instance, the ongoing war between Russia and Ukraine. Only from the start of 2023, the Russian Ruble has fallen more than 16% against the US dollar.

Do Geopolitical Events Influence the Forex Market? 

Do Geopolitical Events Influence the Forex Market?

This is only the direct impact of war on the foreign currency of the country involved in the war itself. The full economic and financial extent of the impact following this war is much far reaching than you can think.

It is not merely the currencies that are impacted, a whole array of commodities is impacted as well. For instance, crude oil, refined oil, gas, metals, and other elements. As supply chains are disrupted, so is everything that is transported through this chain.

Naturally, the value of many important commodities are tied to the value of the foreign currencies themselves.

 

Conclusion

Certain markets are more immune from outside forces than others. They might be only influenced as a result of direct policy making. So they can be controlled in a way. Or we can say they are truly centralized.

But the foreign exchange market is a decentralized financial market trading billions and billions of dollars all around the world around the clock. Because of this large scope and scale, it is more exposed to various events. Politics, being one of the most important aspects of our world, can exert a great deal of influence on the forex market.

Political decisions such as elections or even political figures can directly and indirectly impact the price and value of fiat currencies and thus affect the forex market.

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