Of the five fundamental factors influencing the forex markets, geopolitical developments can have the most immediate impact on prices.
Economic decisions have far-reaching consequences, and their effects can touch every aspect of price discovery. From shifting the terms of trade, to loosening or tightening the supply of currency, one significant news story can impact upon the markets in multiple ways at once.
Recent history has provided several events that influenced forex trading in a significant manner. The UK’s decision to leave the European Union in 2016, is perhaps the most important.
(Julien Warnand, Pool Photo via AP)
But how did Brexit affect global markets; and what can we learn from the way expert traders responded to this unexpected event?
Such questions demand answers relevant to every generation, young and old.
How Brexit Changed the Currency Market
Brexit has been a fascinating case study for foreign currency traders worldwide. It is a political decision which has affected trading relationships between the United Kingdom and the rest of the EU. Because national wealth is closely linked to trading activity, the value of a currency may rise or fall to reflect growing or waning confidence in its issuer’s ability to trade.
In the case of Brexit, the effect was immediate.
(AP Photo/Matt Dunham)
Expert traders were able to interpret the financial implications of the exit vote, and sold sterling. Less experienced speculators saw prices fall in the market, and followed the trend: selling sterling positions, and causing prices to tumble further.
Within a week of the referendum, sterling had lost more than ten per cent of its value against major trading currencies like the US Dollar and the Yen. Brexit arrived during an almost “perfect storm” of external factors. Japan and India have emerged as the global leaders in financial technology (fintech) adoption. Germany remains the continental powerhouse of manufacturing and exports.
With reduced purchasing power from the falling value of sterling, the prospects of the UK have diminished. Cheaper currency gives Britain less opportunity to import goods and services, and less wealth to invest in infrastructure projects. These are factors which forex traders consider individually when planning their trades. In the case of Brexit, they have all happened at once.
Impact and Volatility
Both information, and new technology, played important roles in the post-Brexit valuation of sterling. The susceptibility of the currency to news events has created heightened volatility in the currency: another factor which has deterred risk-averse investors.
This volatility was demonstrated again on October 12th, 2017, when global news networks aired a press conference held by Michael Barnier, the EU’s chief negotiator.
Mr. Barnier announced that Brexit talks had reached a “deadlock”. Consequently, sterling fell half a percent against world currencies in only a few minutes. With negotiations expected to extend into the two year transitional period beyond 2019, forex traders are increasingly viewing the British currency as a volatile market.
How Should Forex Traders Respond to Brexit?
From the Brexit case study, it should be fairly evident that the smart investor is the one who stays ahead of price trends. But, if a trader is not basing his decisions on the price movements of the markets, how does he know when to execute a trade – and which currency pairs to select?
The answer is, once again, information. Trading experts stay up to date with news coverage, and anticipate market moves and wider trends before they begin to appear. Veterans become adept at judging the way the market will perceive any breaking news story – and how other traders will respond. These forex experts take early positions based on their news gathering activities.
They maximise their profits by pre-empting a trend, and beating the slower traders: those who rely only on the price movements of the market itself to inform their decisions. Staying informed of economic and geopolitical developments is arguably the most vital when dealing with Forex fundamental factors.
In an industry increasingly dominated by trading robots and sophisticated algorithms, timing is essential. Interpreting news stories, their value, and potential impact, is therefore a crucial skill for retaining a competitive edge in forex.
It is no surprise, then, that the currency markets are always hungry for breaking news and geopolitical events such as Brexit.
