How Elections can affect Forex markets

by | Jul 3, 2024 | Forex Education

UK

How Elections can affect Forex markets

This week, with the British and French parliamentary elections, I thought I’d look at how elections could and have affected forex trading in the past. I will also look at M2 setups for the week, offering some ideas for smaller timeframe trades and alternative ‘Plan B’ strategies.

It’s non-farms on Wednesday, so as always, be really careful entering trades just before or after this traditionally BIG event.

Elections can significantly impact the foreign exchange (forex) market due to the uncertainty and potential changes in economic policies that come with shifts in political power. Here’s a look at how elections influence forex markets:

1. Market Volatility
Increased Uncertainty: Elections introduce uncertainty, particularly when the outcome is unpredictable or when major policy changes are expected. This uncertainty can lead to heightened market volatility.

Example: During the 2016 U.S. Presidential Election, the USD saw significant fluctuations as the unexpected victory of Donald Trump led to a rapid reassessment of potential economic policies .

2. Policy Expectations
Economic Policies: Forex traders closely watch election outcomes to gauge future economic policies, such as fiscal spending, taxation, and international trade agreements. Changes in these policies can influence a country’s economic outlook and its currency’s value.

Example: The Brexit referendum in 2016, where the UK voted to leave the European Union, caused the British pound (GBP) to plummet as traders anticipated economic challenges and policy shifts .

3. Interest Rate Projections
Monetary Policy Changes: Elections can lead to changes in leadership within central banks or shifts in monetary policy direction, impacting interest rate expectations and, consequently, currency values.

Example: The 2012 Greek elections brought uncertainty regarding the country’s position in the Eurozone, influencing euro (EUR) values and leading to speculation on ECB monetary policy adjustments .

4. Currency Strength
Political Stability: Elections affecting political stability can influence a country’s economic confidence and its currency’s strength. Stable and favorable election outcomes often lead to a stronger currency, while instability can weaken it.

Example: The Turkish lira (TRY) has experienced significant volatility around elections due to concerns over political stability and economic policies .

5. Trade and Foreign Relations
Trade Agreements: Elections can result in changes to trade agreements, impacting currencies of nations with significant trade ties.

Example: U.S. elections often affect currencies like the Canadian dollar (CAD) and Mexican peso (MXN) due to anticipated changes in trade policies .

6. Capital Flows
Investment Decisions: Investors’ perceptions of a country’s economic prospects post-election influence capital flows, which in turn affect currency values. Positive expectations can lead to currency appreciation due to increased capital inflows.

Example: After the 2019 UK general election, the GBP strengthened as investor confidence rose with the expectation of political stability and economic clarity regarding Brexit .

7. Speculative Activity
Market Positioning: Traders often speculate on election outcomes, positioning themselves to benefit from expected market moves. This speculative activity can lead to significant short-term currency movements.

Example: The Japanese yen (JPY) often experiences fluctuations around elections due to its safe-haven status, as traders seek refuge during periods of political uncertainty in other regions .

8. Impact on Emerging Markets
Risk Aversion: Elections in emerging markets can lead to greater forex volatility due to less predictable political and economic outcomes, impacting currencies such as the Brazilian real (BRL) and South African rand (ZAR).

Example: The 2018 Brazilian elections saw significant volatility in the BRL as markets reacted to political uncertainty and potential economic reforms .

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Kind regards,

Thinus

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