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Lesson no. 7:

"Market and Politics"

Reading will take: about 14 minutes

History knows that the sharpest movements in the markets were caused by political events. For example, the Brexit vote and the US election provided high volatility and many trading opportunities. Find out more with this tutorial.

Contents 7 lesson:

How can politics influence the Central Bank and investor behavior?

How can politics influence the Central Bank and investor behavior? There is a direct link between government policy and its economy, so it is not surprising that politics can have a large impact on markets. But how does this happen? And why? Let's find out.

Uncertainty equals volatility

Elections are common in many countries and can have a big impact on markets. Elections can be viewed by traders as political instability and uncertainty, which can lead to more volatility in both the stock exchange and Forex.

Let's analyze how the market behaved in the run-up to the November 2016 US elections? There was a consensus that Hillary Clinton would become the next President of the United States. The overwhelming majority of authoritative polls predicted a Clinton victory.

Therefore, the market was relatively calm, as Trump was considered a more "unpredictable" candidate. However, his victory came as a big surprise. The expectations of the overwhelming majority of investors, traders and ordinary citizens were directed towards the victory of Hillary Clinton. Since these expectations did not come true, this led to great volatility in the market, mainly in the US dollar and gold.

A similar situation occurred in the UK referendum on EU membership. Then the unexpected vote "Leave the EU" caused a sharp drop in the British pound, and also led to speculations that the European Union could disintegrate.

These examples underline the seemingly global abandonment of the existing status quo and call into question the accuracy of the conduct and measurement of survey results. Uncertainty, mistrust can lead to large fluctuations in Forex and other financial markets.

Changes are not always welcome

A change in government often means a change in ideology, which can mean a different approach to monetary or fiscal policy. This can become a serious driver for financial markets. For example, the dollar rose after Trump won the election as the market expected weaker fiscal policy to force the Federal Reserve to raise interest rates.

Many believe that the more the government spends, the more the economy can grow, which will fuel inflation. In such a situation, the country's Central Bank may decide to raise interest rates, which can support the currency.

In addition, many believe that political parties or individuals who are perceived to be more financially responsible or interested in promoting economic growth can stimulate both the stock market and the currency.

If the government, which previously had a positive impact on the economy, loses its credibility, then investors may react nervously by selling currency or stocks, thus provoking a fall in prices.

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Looking for stability

Stability is something that absolutely all investors value. Uncertainty can have a negative impact on the stock market or currency. But this is not always associated with a change of government when it comes to politics.

Let's remember what happened in 2012, when the Eurozone was on the brink of collapse. There was almost no money left in Greece, and politicians were unable to find a clear solution. A similar scenario occurred in 2015, when the country was on the verge of leaving the Eurozone, which led to dramatic changes.

Any uncertainty in the market always provokes a rise in gold price. This asset is historically considered the most stable, and investors massively transfer their finances to it.

It was only when a political deal was reached in Brussels that the market stabilized. Although the measures taken were far from perfect, the sense of stability generated quite significant revival.

As you can see, politics can have a big impact on the financial market. That is why it is worth keeping a close eye on the news from the world of politics.

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