Market participants must stay abreast of geopolitical developments such as conflicts when making trading decisions
Financial trading can be a complicated affair that requires thorough research and consideration of a wide range of political, economic, and other factors.
The markets are constantly evolving, which makes it all the more important for market participants to be aware of geopolitical factors and be well informed before making trading decisions.
Geopolitics affect the stock and forex (foreign exchange) markets to a great degree and learning some of the key factors affecting trading decisions is crucial in staying alert and aware in an ever-changing global economy.
How geopolitics affect the forex market
The forex market consists of national currencies from countries around the world and trading is conducted between these countries in what are called “currency pairs”, where participants swap one currency for another, potentially netting a marginal profit.
Since currencies are tied to real countries, the local and international politics of these countries can play a major role in the performance of their currencies.
Here are a few examples of how geopolitics can affect trading behavior on the forex market:
- Macroeconomic policies – Geopolitical events often lead to changes in macroeconomic policies such as interest rates, fiscal policies and trade agreements. Central banks may adjust monetary policy in response to geopolitical tensions or developments, which can influence currency valuations.
- Commodity prices – Geopolitical events can influence commodity prices, which in turn can impact currencies of countries heavily reliant on commodity exports. For instance, political instability in oil-producing regions may lead to fluctuations in oil prices, affecting the currencies of these countries.
- Trade relations – Trade tensions or conflicts between countries can impact forex markets by affecting trade flows, tariffs and currency valuations. Tariffs commonly affect the trade between countries and, subsequently, currency values.
- Risk sentiment – Geopolitical tensions can affect market sentiment and risk appetite. Uncertainty or instability in geopolitical hotspots can lead to increased risk aversion among investors, causing them to seek safe-haven currencies such as the US Dollar, Swiss Franc, or Japanese Yen.
Understanding these factors are crucial in developing a method of how to learn forex trading as a beginner, consisting of both technical and fundamental factors steeped in geopolitics.
How to keep track of geopolitical developments when trading
The global political order operates in a constant state of flux, which makes it difficult for market participants to keep track of all the major developments that can affect asset valuations and the performance of their portfolios.
However, there are a few important steps traders can take to mitigate the risk and take advantage of opportunities:
- Major news releases – major news, such as interest rate changes, economic growth, trade agreements and more.
- Official trade statistics – national statistics agencies release periodic updates regarding import and export data between countries, which can greatly affect the valuation of their currency.
- Price data – gathering price data for currency pairs and commodities can help you identify key points in the price history to research the reasons behind major price shifts.
Keeping track of these statistics gives you the opportunity to be informed and able to quickly react to changing market conditions — avoiding major drops and taking advantage of opportunities as they arise.
Effects of geopolitics and conflict on trading
An extreme example of geopolitical changes on capital markets can be seen during escalations of armed conflict, which shifts the economies involved completely. As supply chains break down and investor confidence drops, local currencies tend to massively underperform other currencies in the region.
Periods of conflict can affect more than the countries involved, which allows traders to identify the effects of a particular conflict on capital markets.
For instance, if a major oil exporter becomes involved in conflict, their currency is likely to lose value and underperform against other currencies.
Such geopolitical tensions and conflicts destabilise supply chains, which directly affects the economic output of the countries involved. Declining trade and consumption directly affects the performance of currencies. A similar effect can also be observed in the equities markets, as investor panic often leads to mass sell-offs on the market.