The forex (foreign exchange) market is the largest and most active financial market in the world, with around US$5 trillion traded every day. While global events can impact almost all aspects of an economy, due to its nature, they can particularly influence the forex market. As the value of one currency rises or falls against another currency exchange rates can fluctuate greatly. Here we’ll look at some major global events and geopolitical factors and how they can influence the financial market.
The decisions and actions of political leaders and governments can influence the strength of that country’s currency. Any change in an existing economic policy, most commonly caused by an election and new leadership coming into power, can cause the currency to rise or fall. For example, a government that is viewed as more fiscally responsible and which works towards economic growth will generally boost the value of the currency. An unexpected election leads to uncertainty, even in a case when a more democratic government may come into power, and the country’s currency value often falls, at least in the short term.
A physical war has widespread, and generally disastrous result. The country will suffer damage to its infrastructure that will cost the government, and its citizens, billions to repair. The country needs to rebuild, and this is usually financed with cheap capital from low interest rates which then leads to a fall in the value of the country’s currency. The currency of a country at war is almost always volatile due to the uncertainty and instability in the region.
Natural disasters can often ravage a country in much the same way as war does. Earthquakes, tornadoes, hurricanes and floods can not only cause panic and reduce morale, but can cause extreme damage to a country’s infrastructure, costing billions to repair. The damage to infrastructure can severely reduce a country’s economic output and money that would have been spent on strengthening the economy, now need to be diverted to damage repair. Natural disasters also result in economic uncertainty which further reduces consumer spending.
The Bottom Line
Many global events, such as natural disasters or wars, occur unexpectedly and without warning, leaving the affected country no time to prepare. The results can be catastrophic from many points of view and can significantly impact the economy as it tries to get back on its feet and repair the damage that was caused. Couple that with the uncertainty and instability that generally comes to a region after a global event takes place, and the currency can take a major hit.
While you can’t plan for these events, a trader who understands their impact on the financial market, will be able to react faster than someone who isn’t sure how the currencies will be affected by the news. The changes in currency value can be quick so make sure to keep on top of global news if you plan to trade in the forex market.