Political Affects in Forex Market. Is the Forex Market Affected by Political Events?

Political Affects in Forex Market. Is the Forex Market Affected by Political Events?

Yes, the forex market is heavily influenced by political events. The forex (foreign exchange) market is an international market where the value of currencies against each other is determined, and this market is affected by factors such as political events, decisions and uncertainties. Political Affects in Forex:

1. Political Uncertainties and Risks

Political uncertainties and risks directly affect exchange rates. In particular, elections, changes in government, political crises or instability in countries change investors’ perception of risk, leading to fluctuations in the foreign exchange market. For example:

• Election Results: A country’s election results can affect its economic and financial policies. If it is unclear what policies a new government will adopt, this creates anxiety among investors and can lead to sudden movements in exchange rates.
• Political Crises: Political crises, such as civil wars, protests or changes in government, can negatively affect a country’s economic stability and the value of its currency.

2. Economic Policies and Decisions

The economic policies of political leaders and governments are another important factor affecting exchange rates. These policies may include the following:

• Monetary Policy: Central banks’ interest rates, money supply and other monetary policy tools can affect exchange rates. Political decisions play a major role in shaping these policies.
• Fiscal Policies: Fiscal policies such as tax policies, public expenditures and budget balance can also have an impact on the foreign exchange market. Government policies that support economic growth or reduce budget deficits can affect the value of the currency.

3. Trade and Diplomatic Relations

International trade and diplomatic relations can also affect exchange rates:

• Trade Wars and Agreements: Trade disputes, tariffs and trade wars can affect the balance of trade and economic relations between countries, leading to changes in exchange rates.
• Diplomatic Developments: Diplomatic relations between countries can affect investment and trade flows. For example, tensions between two countries can affect investors’ perception of risk and cause fluctuations in exchange rates. Political Affects in Forex

4. Investor Psychology and Trust

Political Affects in Forex. Political events affect investor confidence in markets. The confidence index usually reflects investors’ reactions to political developments. Uncertainty and insecurity often increase volatility in the foreign exchange market.

5. Geopolitical Risks

Geopolitical risks, especially regional and international security threats, can cause large fluctuations in the foreign exchange market. For example, military conflicts or international tensions in a region can drive investors to safe havens and cause large changes in exchange rates.

6. News Flows and Media

News and media reports on political events can quickly affect investors’ perceptions. For example, a negative political news story can lead to immediate volatility in the foreign exchange market.

Examples:

• Brexit: The United Kingdom’s vote to leave the European Union (Brexit) had a major impact on the British pound. There were large fluctuations in exchange rates before and after the referendum.
• US Presidential Elections: The US presidential elections had a significant impact on the US dollar. The economic and trade policies of a new president led to uncertainty and volatility in the currency market.

Which Currency to Trade in Forex? Political Affects in Forex

There are many currencies you can trade in the forex market. However, the forex market usually includes certain major currencies and currency pairs. These currencies and currency pairs are among the most liquid and widely traded currencies worldwide.

1. Major Currencies

The main currencies traded on the forex market are generally as follows:

• US Dollar (USD): The most widely traded currency worldwide. It is known as the “greenback” and is the base currency in many currency pairs.
• Euro (EUR): The common currency of the European Union and the world’s second largest reserve currency. It is known as the “Euro” and is used as the base or counter currency in many currency pairs.
• Pound Sterling (GBP): The currency of the United Kingdom and is often referred to as the “Pound”. GBP is particularly common in trading pairs related to Europe and the UK.
• Japanese Yen (JPY): The currency of Japan and is often referred to as the “Yen”. It plays an important role in Asian markets and is involved in many currency pairs.
• Swiss Franc (CHF): The currency of Switzerland and is known as the “Franc”. It is seen as a safe haven and is especially in demand in times of crisis.
• Canadian Dollar (CAD): The currency of Canada, also known as the “Loonie”. It often moves in relation to commodity prices.
• Australian Dollar (AUD): The currency of Australia and often referred to as the “Aussie”. It is notable for its relationship with commodities, especially gold.
• New Zealand Dollar (NZD): The currency of New Zealand and known as the “Kiwi”. It moves in relation to commodity prices.

2. Currency Pairs

When trading on the Forex market, currencies are usually traded in pairs. Tradable currency pairs fall into three main categories:

a. Major Pairs

Major pairs are the most liquid currency pairs with the highest trading volume. They usually include the US Dollar and are the following:

• EUR/USD (Euro / US Dollar)
• USD/JPY (US Dollar / Japanese Yen)
• GBP/USD (Pound Sterling to US Dollar)
• USD/CHF (US Dollar / Swiss Franc)
• USD/CAD (US Dollar / Canadian Dollar)
• AUD/USD (Australian Dollar / US Dollar)
• NZD/USD (New Zealand Dollar / US Dollar)

b. Minor Doubles

Minor pairs are pairs that trade in one of the major currencies but do not include the US Dollar:

• EUR/GBP (Euro / British Pound)
• EUR/JPY (Euro / Japanese Yen)
• GBP/JPY (Pound Sterling to Japanese Yen)
• AUD/JPY (Australian Dollar / Japanese Yen)

c. Exotic Couples

Exotic pairs usually consist of a major currency and the currency of a developing country. They can often have lower liquidity, which can often result in wider spreads and higher volatility:

• USD/ZAR (US Dollar / South African Rand)
• USD/SGD (US Dollar / Singapore Dollar)
• EUR/BRL (Euro / Brazilian Real)

3. Strategies and Factors Related to Currencies

Here are some strategies and factors to consider when choosing a currency in the forex market:

• Liquidity: Major currencies usually have high liquidity, which means narrower spreads and lower transaction costs.
• Volatility: Exotic currencies can often have higher volatility. While this offers potentially higher gains, it can also bring greater risks.
• Economic Data: The values of currencies are influenced by the economic situation of countries. Interest rates, inflation, unemployment rates and other economic data can affect exchange rates.
• Political and Geopolitical Risks: Political events and geopolitical risks can also affect exchange rates. For example, a country’s elections or changes in international relations can affect the value of currencies.