While there are multiple factors that affect the direction of the movement of money on the forex market, the political conditions in a country can help people understand some of the movement on the forex market. The fact that foreign exchange trading has become such a globalized activity means that macroeconomic events play an even greater role in forex than ever before. Not only economic data have an effect on the interbank currency market. Each news headline may bear the potential to negatively or positively affect a particular currency.
It is now indisputable that politics, not economics is the big driver behind fluctuations in the world's currency markets. Traditional relationship between major currency movements and economic events has now come to an end and in its place a big political developments like Brexit, conflicts and elections are now in charge. When it comes to forecasting forex rates, the science of fundamental analysis involves taking into account a variety of relevant economic and political factors for one currency relative to the other currency in each currency pair considered.
Currency movements seem to be more sensitive to headlines on Trump, Brexit, the French elections, and more Trump rather than monetary policy announcements these days. One of the top explanations for this is that central banks have pretty much used up all their easing tools in boosting liquidity and cutting interest rates to historic lows, which suggests that they may be running out of moves. Because of that, economies and market watchers are turning their attention to government fiscal policy for stimulus.
A country's political state and economic performance can affect its currency strength. A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country with sound financial and trade policy does not give any room for uncertainty in value of its currency. But, a country prone to political confusions may see a depreciation in exchange rates.
The health of a nation’s currency depends on the actions of its political leaders. Therefore any change in a country’s government can affect its currency by altering the nation’s economic policies. If a government changes then this may result in new economic policies that will cause the currency to either rise or fall. Growing global tension will result in instability in the forex market. Irregular inflow or outflow of currencies may result in significant fluctuations in exchange rates. The stability of a foreign currency is closely related to the political situation of that place. In general, the more stable the country is, the more stable its currency will be.
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