World Events Shape the Foreign Exchange Market

The foreign exchange market has developed into the world’s largest financial medium over the last twenty years. The market frequently posts a normal daily turnover of over five trillion dollars following the Bank of International Settlements Triennial Survey in 2019. Considering its great size and scope, the foreign exchange market’s volatility can be hindered for several reasons.

Whether you are trying to find out about the Iraqi dinar revalue or information on another currency, the primary market drivers can be classified according to geopolitical and economic factors. Bearing in mind the importance of said factors, knowing how world events can influence the foreign exchange market is critical to successful trading.

The Forex Market and World Events

When looking at events that move the market, elections are usually at the top of that list. The influence election has on the world market is significant, for instance, the leadership rivalry in Japan, the United Kingdom, the United States, or the 2016 Brexit Referendum. In June 2016, when the UK decided to depart the European Union, the GBP/USD changed to 1800 pips in a day, more than half its range over the past six months.

Besides the geopolitical factors like elections, standard economic elements such as trade balance and GDP can significantly affect a country’s exchange rate. Therefore, to become successful in currency trading, you must understand how global events influence the market in forex trading.

Economic Factors

• Central banking policy – Money policy is an essential market driver in forex trading. It is a comprehensive approach to boosting pricing stability by managing a country’s money supply. The policy is conducted by the central banking authority of a country through rewarding reserve requirements, interest rate regulation, and open market operations.
  For instance, the Iraqi dinar revalue in 2020 led to a devalued currency. In general, if there is an unexpected increase in interest rates, the underlying currency will benefit, while an unexpected rate cut will weaken the currency.
• Gross Domestic Product – A nation’s GDP depicts its growth, aggregate output, and economic activity. The higher the GDP, the higher the economic activity and vice versa. According to the International Monetary Fund’s study, the three leading countries in GDP are the United States, China, and Japan.
  The GDP numbers, however, do not result in substantial market moves when assessing the power and health of a nation since the data is usually released over a month after the relevant time frame.
• Inflation rate – Inflation measures the increase in producer and consumer prices. The central banks mainly look to manage inflation by increasing the interest rate, limiting the effect of currency devaluation. Therefore, a high inflation rate indicates that the central bank is more likely to increase the interest rates, resulting in a strong currency.

Geopolitical Factors

• Political events – The foreign exchange market is not into the uncertainty of politics. There are many studies about both negative and positive impacts of an election on the global market. For example, the Brexit Referendum in 2016 led to severe pressure on the British currency. The pound dropped to a level that was never seen since 1985.
• Crisis on humanity – Crises such as pandemics, wars, and terror attacks negatively impact the economy and currency of the country affected. A perfect example was the coronavirus pandemic in 2020. Travel bans, shutdowns, and mandatory quarantines quickly sent the global economy into a deep dive. The US dollar, among other currencies, was powerfully hit, falling significantly.
• Natural disasters – Disasters such as wildfires, tornadoes, earthquakes, and hurricanes happen unexpectedly and bring about significant consequences financially. An example is the brush fires in Australia that happened between 2019 and 2020, which significantly impacted the currency and economic market. The damages that happened were in billions of dollars, leading the Reserve Bank of Australia to adopt a supportive policy quickly. The rate cuts by the RBA made the Australian dollar go lower compared to the US dollar hence the liaison between the geopolitical and economic events.

It is difficult to emphasize the importance of how events in the world can significantly influence the market in forex trading. From epidemics like COVID-19 to a planned release of economic data, the effect of these factors can be profound and widespread. If you aspire to be a forex trader, knowing and learning about such occurrences is critical to successful trading.