The great movements in the history of financial markets were caused by political rather than economic events. For example, the Brexit vote, provided us with high volatility and multiple commercial opportunities.

There is a direct relationship between politics and economics, so it is not a big surprise that politics can have a significant impact on financial markets. But how does this happen and why? Let’s find out.

What is Forex Fundamental Analysis?

Uncertainty equals volatility

An election – a common event for most countries – can have a great impact on financial markets. The elections can be seen by traders as an isolated case of potential instability and political uncertainty, which generally leads to greater volatility in both the stock and currency markets.

We are going to analyze how the market performed in the face of the US elections in November 2016. The consensus was that Hillary Clinton would be the next President of the United States. The vast majority of big name polls gave Clinton an advantage over Donald Trump, so the market was relatively quiet, making Trump the most ‘unpredictable’ candidate. However, his victory came as a huge surprise and led to some significant moves as traders had to price in what his presidency may entail.

Because the vast majority of confidence polls conventionally had Clinton leading the way, markets did not appear poised for a Trump victory. A similar situation occurred in the UK’s referendum on EU membership, where a largely unexpected ‘one vote’ to leave ’caused a sharp drop in the British pound and led to speculation that the European Union may disintegrate. . These two incidents reveal a seemingly global rejection of the established status quo, and cast doubt on the accuracy of the survey and measurement. Uncertainty, mistrust and disbelief lead to faster movements in the market.

Check out XM’s Economic Calendar

Change – not always welcome

A change of government often means a change in ideology, which usually means a different approach to monetary or fiscal policy, both of which, especially the latter, are great drivers for financial markets. The dollar rose after Trump won the election as a result of more expansionary fiscal policy to force the Federal Reserve to raise interest rates.

Generally speaking, the more a government spends, the faster the economy grows which usually leads to higher inflation. In such a situation, the country’s central bank has to act by raising interest rates, which supports the currency. Furthermore, political parties or individuals who are seen as fiscally responsible or more concerned with promoting economic growth tend to increase both the stock market and the currency. Thus, in the case where a government that sees itself as a stable economy is in danger of losing its position of power, traders may react nervously and may sell the currency or shares.

7 Major Economic Events & How they impact the market

Seek stability

Stability is something that financial markets appreciate. As we have already mentioned, uncertainty is something that can have a negative impact on the market for stocks or a currency. However, it is not always related to a change of government when it comes to politics. Let us remember what happened in 2012, when the euro zone was on the verge of collapse. Greece almost ran out of money and politicians could not find a clear solution. A similar situation occurred in 2015 when the country was one step away from exiting the euro zone, which resulted in some sharp movements in markets such as the DAX, CAC 40 and many more.

It was not until a political agreement was reached in Brussels that the market stabilized over time. Despite the measures put in place, they were far from perfect, so the feeling of stability caused a significant rebound.

As you can see, the policy could have a great impact on the financial market. That is why you must closely monitor the political scene.

Access to Tickmill’s Economic Calendar for fundamental analysis