Effect Of Global Events On The Forex Market
Major global events can affect currency valuations; therefore most traders keep a keen eye on any significant worldwide developments and how these can impact their trading.
Why do global events affect Forex? Major worldwide developments influence the supply and demand of currencies because market participants reposition themselves based on their interpretation of how future valuation will be affected.
Not just prices are affected either. The amount of volatility can significantly swing due to global events and volatility influences the type of market environment. In Forex trading, trends usually occur with more volatility while ranges are the result of low volatility.
Trading emotions greed and fear are prevalent in times when major events are affecting the markets. Some of the biggest moves in history have occurred when a global even triggers greed and fear in the markets.
But is Forex trading significantly impacted by big developments across different parts of the globe? The answer is yes. The valuations of currencies are interrelated, so there is a snowball effect in Forex markets i.e. events in one country can trigger a shift in supply and demand throughout the market because of correlations and other factors.
What are the global events that affect the Forex markets?
Political developments such as elections can be a powerful driver of market prices. Reason being that this can lead to policy changes that either aid or hinder economic growth, which is the main factor in determining interest rates.
Pro-economic growth outcomes lead to higher interest rates, increasing the value of a currency; anti-economic growth leads to lower interest rates, decreasing the value of a currency.
Furthermore, political changes influence the citizens of a country who determine consumer spending, which is also a major factor in determining interest rates.
Market participants prefer a stable political environment in a region, any turmoil will usually negatively impact the currency.
Great examples of how politics can cause big moves in Forex are the Trump election and Brexit.
This is less prevalent in modern society however, wars have shown their power in driving market prices in the past.
Wars result in loss of life, damage to infrastructure and large government expenditure to fund the war. All of these cause lower interest rates which decreases the value of a currency.
A trade war occurs when countries impose import tariffs on one another. Usually, this leads to the purposeful devaluation of a currency, to negate the effect of tariffs and aid a countries global exports.
Therefore, trade wars are negative for a currency and the global economy in general. A prime example of this is the US vs China trade war.
Just like a war, natural disasters result in significant loss of life and the damage of infrastructure, both decrease the potential economic gain. Governments must also use money and resources to repair infrastructure instead of investing it in growth opportunities.
Moreover, the reduced spending of consumers in the aftermath slows economic growth. All of the above mean lower interest rates which drag down the price of a currency.
A pandemic, such as COVID 19, can dictate market direction. Since most employees cannot work, businesses can suffer greatly which hurts the global economy.
Fear among market participants is high during times such as this, meaning most price fluctuations are dictated by new information about the disease. When fear is high, emerging market currencies are usually hit hard, while risk-off currencies thrive.
All traders need to understand what global events are driving market moves. This helps to manage risk appropriately and adjust to market conditions. Now that you know what types of global events can impact your Forex trading…
Happy stress-free trading