How can political conditions interfere the forex market?

The forex market is an international marketplace where individual traders, businesses, governments, organizations and financial institutions from across the world exchange currencies.  The average daily trading volume of the forex market is over $6 trillion making it the largest as well as the most liquid markets in the world. 

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There are many factors that affect the forex market and cause fluctuations in the value of currencies. Out of which politics has a deep impact on the flow of foreign exchange that is often ignored by the traders. Politics is a major factor that causes great uncertainty for forex traders and investors around the globe. This is due to the reason that political events are usually long drawn, Largely unpredictable and involve more than one countries.

Several geopolitical events, like the French elections, Trump’s presidential win, Brexit, and EU-China trade war caused huge price swings in the forex market. 

Political factors that Affect the forex market

The following political factors influence the forex market.

  1. Political stability

Countries having low probability of political uncertainty attract foreign investors more than less politically stable countries.  Due to this, political stability of a country raises the demand for the national currency and has a significant influence on forex rates unsecured business credit line.

For example, Switzerland enjoys political stability by maintaining a neutral stance and avoiding conflicts with other nations.  Due to this reason, the Swiss franc enjoys a safe status in the currency market.

On the contrary,  coups, protests and political chaos causes the economy to destabilize and weakens the local currency.  This raises the risk of holding the respective domestic currency and reduces its demand.

2- Involvement of Government in the Economy

The control of the government on the economy can have a significant impact on the currency. Such governments successfully manage their currencies very closely. 

However, in a globalized world, increasing mobility of capital results in higher uncertainty, and in return, greater volatility in the forex market.

  1. Elections

While  elections are regular events that are held in almost every country, several elections attract investors’ attention more.  During any election campaign, the politician attracts the voters by ensuring their focus on the economic policies of the country and the impact they will have on the country’s economy. The different economic ideologies of various candidates can cause great uncertainty, this results in the high volatility  in the currency market in the run up to election results.

4- Government fiscal policy

Fiscal policy is the one that involves the budget of the government over a certain period of time . A government collects tax to finance different projects. If the government spends higher, it boosts the economic growth of the country, which propels business activity.

Therefore, an increased high government’s spending means the rise in the value of the country’s currency.

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