How Geopolitical and Economic Events Affect Forex Trading: Examples, Opportunities, and Tools to Manage Risks
Trading foreign currencies is a popular investment strategy that allows you to diversify your portfolio and discover new trading strategies and tactics. However, like most investments, forex trading is susceptible to global political and economic events.
Major geopolitical and economic events can increase volatility in foreign currency trades and cause investors to panic or become overconfident. In this article, you’ll learn how major geopolitical events affect forex and how you can reduce your risks of being caught up in the chaos with the right tools.
Which geopolitical events affect forex traders the most?
Interest rate changes
Increasing or dropping interest rates helps control a country’s economy. Each time a central bank raises or lowers interest rates, it immediately reflects on the currency strength of that country.
For example, let’s say the Federal Reserve in the USA raises interest rates. This strengthens the US dollar against other currencies. As a result, EUR/USD might fall, and USD/JPY might rise. This volatility can offer great opportunities for skilled traders who manage to capitalize on price fluctuations.
Economic growth reports
Most countries release their economic growth reports, such as GDP growth, quarterly or annually. This influences the currency strength of a country. For example, if the UK reports stronger-than-expected GDP growth, the British pound increases in value and tends to appreciate, such as going long on GBP/USD or short on EUR/GBP.
Employment data reports
Most developed countries release employment data such as unemployment rates, new jobs added, etc., monthly, quarterly, and annually. Usually, after each report is released, the forex and other financial markets experience volatility episodes.
Employment rates reflect the overall economic situation of a country. The better the employment data and predictions, the stronger a country’s currency. Most trading opportunities happen within the first minutes after a report is released.
Natural disasters
It’s more difficult to predict natural disasters and their implications for the economy and forex market. Usually, the affected country’s currency drops, but it might increase depending on the repatriation efforts. For example, in a scenario where a major earthquake happens in Japan, the Japanese yen weakens due to economic concerns, followed by potential strength due to repatriation.
Ride out market bumps with VPS for forex trading
While it’s difficult to always prepare for major geopolitical events and protect your assets from losses, you can lower your risks with the right tools. A virtual private server (VPS) gives you a private environment with dedicated resources such as CPU, memory, and storage to have more control over your trading activity. If you set it up right, VPS Forex can help you stay ahead of any major news and lower the risks.
You can lower your risks by:
- Setting up news feeds and economic calendars
- Creating and testing event-specific trading algorithms
- Implementing risk management strategies
- Setting up backup and redundancy to avoid downtime during critical events
