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The Impact of Global Events on the Forex Market

Global events can influence almost every aspect of the economy, but they are especially impactful on the foreign exchange (Forex) market.

The values and exchange rates of currencies can fluctuate greatly as a result of major events taking place around the world.

Here is a look at three types of global events that can have a significant effect on the Forex market.

Political Events

The strength of a nation’s currency is dependent on the actions and decisions of its political leaders.

A change in government following an election leads to the imposition of new or modification of existing economic policies, which can cause the currency to rise or fall.

For instance, if a government that spends irresponsibly is replaced by one that is fiscally conservative, it is likely that the currency will gain strength.

On the other hand, a government that establishes policies that are unfavorable for businesses will cause the currency to decline.

The Forex market is not only affected by major political events; it can also be influenced by the outcome of a single governmental decision.

For example, the US dollar dropped to a 10-month low in July, 2017 following the collapse of President Trump’s healthcare bill, according to Reuters.

An article published by Global Resources, states that lawmakers have created certain tax opportunities to encourage businesses to stimulate the economy, which can have a positive impact on the currency.

The Impact of Global Events on the Forex Market

Natural Disasters

Earthquakes, hurricanes, and other natural disasters can substantially deplete resources, undermine economic productivity, and therefore, lead to currency decline.

They can cause extensive damage to infrastructure, making it difficult for the affected area to function and draining substantial funds for repairs that could otherwise be used for productive purposes.

In addition, a natural calamity can hurt the morale of a country’s citizens, resulting in a decline in consumer confidence and spending.

War

The outbreak of a war has the same effects on a nation as a natural disaster, dealing a big blow to a country’s economic viability, costing the government and citizens a huge amount of money, and inflicting severe or irreparable damage to infrastructure.

Rebuilding efforts are usually financed with cheap capital that results from low interest rates, which will inevitably cause the domestic currency to devalue.

Even the possibility of a war can have a significant effect on the currency of a nation.

For instance, the dollar dropped to a four-month low on August 29, 2017 after North Korea fired a ballistic missile over Japan, as reported by XM.

The value of a country’s currency is very much dependent on its economic strength.

Adverse global events and other factors that cause uncertainty to predictable economic forecasts will more often than not lead to unfavorable currency outcomes.

Filed in: Forex Basics

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