Internal, regional, and international political conditions and events can have a profound effect on currency markets. The political landscape of a nation plays a major role in the economic outlook for that country and, consequently, the perceived value of its currency. Forex traders are constantly monitoring political news and events to gauge what moves, if any, a country's government may take in the economy. These can include measures from increasing government spending to tightening restrictions on a particular sector or industry.
The currency markets of the world can be viewed as a wide ranging and constantly changing mix of current events. Due to the volatile nature of current events and the constant shifting of supply and demand, the price of one currency in relation to another is always changing. No other market is affected so much by what is going on in the world as much as the Forex. National and international political events and conditions can have a significant effect on regional currency markets, as well as the Forex market as a whole.
As would be expected, times of political turmoil and instability can have a negative impact on a nation’s economy. On the other hand, if a nation instills a new government deemed “economically friendly,” favorable economic and trading conditions may result. When a country has a change of government, it often comes along with a corresponding change in ideology. This could mean a new approach to monetary policy and fiscal regimes, both of which are important in determining the value of the country’s currency.
From a trading and investing standpoint, the basic rule of thumb regarding the marketplace of financial securities is simple: Traders and investors do not appreciate looming uncertainty. The U.S. presidential elections provide a voracious debate upon the direction of the country, and more importantly, provide uncertainty unto the marketplace. Equities, futures and forex markets are all interested in the relative strength of the United States dollar, and ultimately that strength is based upon the economic health of the nation as a whole.
A country that is considered politically unstable will not be a favored trading partner. This will affect its forex trade and the value of its currency in this market. On the other hand, a progressive political leader and a stable leadership pave the way for increased investments as investor confidence becomes strong. Because the Forex market is a global, complex and inter-connected marketplace, events occurring at any place in the world usually have the potential to immediately cause an impact on exchange rates of currencies.