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Currency market and politics. Is there a correlation?
Have you ever noticed that political events affect the market and also have a big impact on economic data? Why does it happen and what political events should traders pay attention to?
Why does politics affect currency exchange rates?
The answer is simple: investors invest their money in countries with strong economies and stable political systems. Political uncertainty can weaken the domestic currency. As a result, investors will withdraw their investments and place them in countries with stronger economies. Therefore, all this leads to economic suffering and a greater depreciation of the domestic currency.
But that doesn’t mean political risk has a negative impact on traders. The big advantage of trading is that you can profit not only from strong currencies but also from weak ones. The most important thing is to accurately predict how economic events will affect the currency.
What political events can affect the market?
It’s time to take a look at the following events and their impact on the market.
1. Election. Elections are one of the important events that affect the domestic currency.
The market perceives elections as a risk no matter what the new government will do to the currency. Any delay in the election could weaken the currency because a delay means uncertainty. Unexpected results have a large impact on the market and cause high volatility.
Example. Until now the President of the United States of America Donald Trump is one of the most important political events in the world, and it all started with the election. After the announcement of Donald Trump’s victory, the value of the USD and currency markets fell apart. First because some people believe that Donald Trump will become President of the United States. Both markets don’t know what to expect from a businessman in politics.
2. Social uncertainty.
When local residents are not happy with the government, it can lead to a clash of power, and the result is a withdrawal of investment. The capital city of a country is always afraid of social disturbances.
3. Disputes between countries represent negative economic events.
This is one of the most dangerous economic events for the market and has minimal impact on the two currencies.
Example. The worst stage of disputes between countries is sanctions. One example is the sanctions from the United States against Russia which caused the ruble to fall.
Another recent example is the breakdown of diplomatic relations between Saudi Arabia and Canada after a human rights conflict. As a result, Saudi Arabia expelled the Canadian ambassador, and plans to repatriate thousands of students studying medicine and patients seeking treatment in Canada and cancel all flights to Toronto. Canadian dollar weakened on the negative news.
When something threatens the unity of a country or a political bloc, it will undoubtedly have an impact on the market economy.
Example. Scotland decided to hold a referendum on leaving the UK in September 2014. The British pound was under immense pressure during this period before the time frame for holding a referendum was set. News of the possible outcome of the referendum made the Pound stronger and weaker.
As of now the Brexit deal is the most important event that affects the British Pound more than any economic data. Even though the referendum was held more than 2 years ago, it still had a huge impact on the GBP. The uncertainty of the agreement between the UK and the euro zone caused the pound sterling to weaken.
5. International meetings and associations
Meetings of official representatives of different countries always have a big impact on the market. Traders may be able to get a clue from the relationship between countries as well as the world situation as a whole. Meetings on important issues such as the Greek crisis or Italy’s participation in the eurozone have a big impact on the market.
An example is the speculation that Italy will exit the euro zone causing a medium-term downtrend for the euro.
6. Speeches and political comments from government officials.
The market follows all comments and speeches given by government officials. Sometimes these comments can reverse market expectations.
For example in January where the USD was already weak and the market was anticipating steps from the Fed to support the USD, but Treasury Secretary Steven Mnuchin said that the weakening USD was good for the United States. After these comments, the USD weakened again and touched its lowest value.
In conclusion, we can say that political events are a good driver for the currency market. Experienced traders will take advantage of any event: whether it has a positive or negative impact. Follow the latest news on Axi’s Official Website to make accurate predictions about the impact on currencies of important world events.