The Impact of Geopolitical Events on Forex Markets

Types of Geopolitical Events

NATURAL DISASTERS

Imagine, a country's government has allocated funds towards that country's development. The country is doing great in terms of exports. They have their monopoly, their product is unique and wanted by people from all over the world. One day, an intense tsunami hits one of its major cities, now the entire city is flooded. Along with a lot of damage, even the exports would have to be stopped. This acts as a major crisis. Natural disasters, such as floods, hurricanes, and more, impact the FX market by diverting funds from economic development towards rebuilding efforts, which ultimately weakens the affected country's economy and currency value. 

POLITICAL CHANGES

Political conflicts often occur when there is a change in the leadership. Some might protest too leading to market uncertainty. When a new government is chosen, they have the power to change the policies, these policies impact various aspects of the economy. If the decisions taken by the government makes its citizens happy and content, then there is a low chance of market uncertainty. But if the citizens are unhappy, it can lead to strikes, protests etc. This leads to disruption in a country as its economy and currency both gets affected. Hence, government policies can make or break a country's currency. It is always undesired to have political instability in a country.

GLOBAL CONFLICTS

Geopolitical tensions and wars disrupt trade and economies, causing FX market volatility. Attacks affect the currencies of the involved countries for extended periods. When two countries go against each other, it brings a lot of damage to both the countries and its citizens. This leads to financial losses and causes higher currency volatility. Even disputes over borders create major uncertainty and impact economic stability. Lets say, a nation who is a leader in producing and supplying cotton is in trouble, then, the price of cotton all over the world will change as the main source of supply has been disrupted.

CENTRAL BANKS

When the government changes its taxation policy or increases/decreases its expenses, it impacts the nation's currency and economic stability. Huge deficits and surpluses play a big role. Central banks help in reducing the impact of geopolitical events by adjusting their monetary policies to stabilize the currencies. Currencies do well when central banks raise interest rates and the opposite when interest rates decrease.

Also Read: Understanding Forex: How Central Banks Influence the Currency Market?

TRADE POLICIES

Trade agreements and policies between nations significantly affect currencies in the forex market. Trade conflicts cause currency depreciation, while positive agreements result in currency appreciation.

Also Read: Diversify Your Forex Portfolio: Trade Multiple Currency Pairs

HEALTH DISASTERS

Recently, we faced the Covid-19 pandemic and it took a toll on countries and their trade practices. It impacted international imports and exports significantly. It must have not been easy for traders to trade during that time due to the rapid market fluctuations. This acts as a state of hazard.

Strategies to Mitigate the Effects of Geopolitical Events on Trading

What if you are confident about your trading strategy, but something goes wrong? What do you do, now? One should always think of the best but at the same time, be prepared for the worst. Formulate detailed, well-thought strategies to navigate the unstable forex market during geopolitical crises. Currency prices hugely fluctuate due to geopolitical events such as trade disputes, political instability, natural disasters and more. The following tips and tricks can be used to lessen the effect of geopolitical events on trading:

TECHNICAL ANALYSIS

Employ technical analysis to identify trends and potential reversal points. Why is it necessary? This might help you make informed decisions and find trading opportunities despite turbulence. You can't just place a trade because your heart says so. You have to put some thought behind your trades so that they make sense during the on-going market condition. Look for chart patterns and technical indicators that indicate possible market changes.

REMAIN INFORMED

Regularly follow trustworthy news sources and financial updates to stay informed about geopolitical developments. Real-time information can help you anticipate market reactions at that very point of time. Keep a check on economic calendars for upcoming events and data releases that might be affected by geopolitical events. As a trader, you are supposed to know what is happening globally so that you can plan your trading moves accordingly.

RISK MANAGEMENT

Would you try bungee jumping without a harness? NO CHANCE! Why so? It is because who does not want to be safe? Well, even your trades want to be protected. Implement techniques such as stop-loss orders and position sizing to manage or avoid risks. Smaller lots can help reduce the damage caused by unexpected geopolitical events. You should also keep a good risk-reward ratio in mind so that you know that if you are facing too much risk then the reward is also going to be that big.

REMAIN ADAPTABLE

You can never always predict changes, but you can always be shielded. Get prepped for a variety of scenarios depending on anticipated geopolitical changes. Make provisions for different scenarios so you're ready for unforeseen changes in the market. Adjust trading plans based on changing market conditions and geopolitical factors.

MARKET SENTIMENT

Track market sentiment indicators to gauge how other traders and investors are reacting to geopolitical events. This can provide insights into potential market movements and trends. Use volatility indicators to assess market conditions and adjust your trading strategies accordingly. High volatility often accompanies geopolitical events and understanding it can aid in making strategic decisions.

Traders must grasp the connection between geopolitics and currency values as events like trade policies, wars, and political crises can affect currency markets. Unforeseen uncertainties can impact currencies negatively. Experienced traders incorporate world events into their strategies by analyzing news from reliable sources. This helps them profit even when there is high market volatility. Hence, traders should have certain strategies that would help them trade and benefit during geopolitical events.