Currency prices reflect the world around them. Forex trading is influenced by multiple factors including geopolitical events, and these events can, in turn, critically influence trading strategies. That is why top traders typically use some form of fundamental analysis when devising trading strategies. This helps them successfully navigate these events.
Global events and currency markets
Global events consist of a wide range of things such as elections, conflicts, trade disputes, and international relations. For example, tension in international relations that leads to sanctions against a particular country can cause that country’s currency to depreciate in value.
When global tensions rise, it is not uncommon for investors to seek out what are known as safe-have currencies. Two examples of safe-have currencies are the Japanese yen (JPY) and the Swiss franc (CHF).
Elections and their impact on forex markets
It is not uncommon for forex traders to monitor significant events such as US presidential elections. Astute traders are aware of the potential impact of these events. By keeping an eye on major elections, traders can pivot their strategies accordingly, particularly if there are corresponding changes associated with such leadership changes. Tax policies and budget plans, for example, can vary significantly based on political party, which is why election outcomes play a role in how a nation’s currency responds.
Essentially, any political or economic shift can impact a country’s currency. If there is a perceived expectation of economic growth as a result of a particular leader getting elected, the strength of that nation’s currency may experience an increase.
How central banks affect currencies
Central banks control interest rates, and changes in interest rates can lead to currency appreciation. Any time a central bank of a particular country increases interest rates, foreign investors are greatly influenced in their decision to invest by currency fluctuations. Sometimes this can be because they stand to make a greater return on exchanges, other times it might negatively impact their investments.
The effect of global events on portfolios and trading strategies
A forex trader will never be able to completely minimize the risk that volatile fluctuations can have on their portfolio following major geopolitical events. However, there are definitely a few things they can do to potentially lessen the impact. After analyzing live forex charts, traders should make sure to use risk management tools such as stop-loss orders. A stop-loss order will limit their risk on the downside. They can control their risk by identifying a price at which they want to exit the trade. Monitoring the price of one or many currencies is straightforward and can even be accessed through a mobile app.
When devising a trading strategy, the weight a forex trader might give to geopolitical events will be influenced by several factors including their personal risk appetite, whether they are a day trader or long-term investor, and how diverse their portfolio is otherwise.
An ordinary citizen and forex trader cannot influence or change what is happening in the world around them. However, they can control how they react to those events. Being mindful of current events including the global geopolitical landscape is extremely important to mitigating the impact on a forex portfolio.