Influence of geopolitical and political factors on the forex market

  • May 11 2022
  • by
  • Analyst AZA
Influence of geopolitical and political factors on the forex market

Influence of geopolitical and political factors on the forex market

This article will highlight the impact of geopolitical and political changes on the markets, which means that investors and traders now need to pay more attention to them than ever before. This article will be based on current developments that we are seeing in the financial markets, especially in the Australian economy. The war in Ukraine, the slowdown in the Chinese economy, higher interest rates, and other topics will be the focus of the article. The content of the article will be very useful when making future transactions. In previous months, we have seen some Russian hostility towards Ukraine. This hostile environment has been there before, it has only intensified and become too serious. The root of the conflict is Ukraine's desire to remain a free and democratic country. Ukraine was able to unite the forces of NATO member countries, which are considered adversaries in Russia.

NATO includes European countries and the United States of America. Since Ukraine is located close to Russia's borders, it has been argued in Russia that if Ukraine joins NATO, it will be beneficial for Russia's adversaries, since they will have superiority both militarily and on the intelligence front. Ukraine's refusal to accept Russia's demand, which does not want Ukraine to remain an independent state, led Russia to attack Ukraine with the ultimate goal of seizing its territories and establishing total control over the country. The war between the two countries caused shock around the world and had a very big impact on the global economic landscape. Both countries are major exporters of several commodities and global supply disruptions as a result of the war
The sanctions have yet to show tangible effects. Russia is one of the largest oil suppliers, while Ukraine is the main supplier of wheat, buckwheat, and other commodities.

The invasion caused an increase in the demand for goods and, consequently, an increase in their prices. Western countries countered the invasion by supplying Ukraine with military hardware, imposing sanctions on Russian businesses, and withdrawing some of their services to the country. The sanctions meant that Russian businesses were restricted from doing business in the Western territories, which hit the Russian economy hard. China is a major player in the global economy and the largest holder of foreign exchange, so China's position in the conflict will be an important factor to consider as the war escalates. In previous years, China has been recognized by the United States as a strategic rival, and as a result, this has led China to improve its relationship with Russia.

China had some animosity towards Taiwan, and we saw some diplomacy begin to emerge between them as a result of the united front represented by Western countries and Ukrainian resistance. Since China seems to regret its established ties with Russia, it will not simply sever them. The sanctions imposed on Russia have proven to be toxic to the Russian economy, so China will be very careful about attacking Taiwan as they will potentially face the same consequences that Russia has faced. China manufactures its products at very low prices, if the Chinese economy takes a huge hit, it could be devastating for the world economy, especially for poor countries. Sanctions on China would also hurt their main trading partners like Australia. Australia is a major merchandise exporter and the housing sector is one of their booming sectors, making them ideal partners with China because China is experiencing a lot of growth and thus needs commodities.

It can be argued that to reduce the level of risk placed on Australia by a potential geopolitical downturn in China, Australians need to diversify their trading industry. This will be a difficult task because the economic development models of other countries are very different from those of China, which makes China an exception. Due to cheaper Chinese products, Australia could have a large trade surplus. The war in Ukraine benefited the Australian economy, mainly due to high commodity prices, but higher energy prices added to inflationary pressures. Inflation in Australia has been modest compared to other developed countries, as evidenced by maintaining a low policy rate while other countries are raising theirs, the monetary stance is very accommodative, while other countries have begun to tighten their policies as monetary credit and fiscal.

Although now Australia is starting to show signs of an inflation problem, as indicated by their largest sector, i.e. the housing sector. Rents are rising, transport costs are rising, prices for building materials are rising, and construction is insolvent. The Reserve Bank of Australia is likely to start raising rates in the foreseeable future to keep the cost of living in the economy down. Australia has historically seen an increase in household savings and a lot of people are sitting on cash, so it will take a lot of work for this to affect consumption and spending. There will be elections in Australia. There was controversy over whether the RBA would raise rates during elections, my answer is yes because they have done it before, one of the political events that can affect the foreign exchange market is the presidential election.

In general, the uncertainty about which party will run the government may lead to some weakness in the currency of this particular country. For example, the battle in the 2004 US presidential election was very intense, aggravated by the various models used by the candidates to solve the problem of budget deficits, which put a lot of pressure on the dollar. The situation was aggravated by the fact that international support for George W. Bush was minimal because of his plans to overthrow Saddam Hussein. In the coming days, we saw the dollar drop six hundred points against the euro. With Bush's victory made possible and later proven, the dollar fell further against other currencies as markets began to evaluate the election results. After Election Day, the US dollar rose another two hundred points and gained another 700 points before peaking 6 weeks later.

All of these major moves took place in just two months, which may seem like a very long time to come, but this political event affected the markets, and for those who knew what was happening and understood their basics, they would produce an extraordinary return. However, this is important for intraday traders and scalpers because since the market was selling dollars in the run-up to the US presidential election, it would be profitable for a trader to buy when the market
restored and did not try to sell the peaks. If you want to consistently make profits in trading, you need to be on top of things and keep a close eye on the news as it can cause big moves in the market you are trading.

In previous months, we have seen some Russian hostility towards Ukraine. This hostile environment has been there before, it has only intensified and become too serious. The root of the conflict is Ukraine's desire to remain a free and democratic country.


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