HOW DOES US POLITICS AFFECT THE FINACIAL MARKETS?

Political events and their outcomes have significant impact on the financial world, and when it comes to the United States (US), the somewhat turmoil of politics can heavily affect the global base currency.

The effects on the market are especially apparent when there is an election, or a transitional period between presidents, as new policies and regulations are introduced, and decisions are made surrounding spending, the economy and industries of focus.

Let’s take a look further into the relationship between US politics and the financial markets, and how recent events in particular, have had an impact.

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The economy and forex

Experienced foreign exchange (forex) traders will always closely monitor any political events, as these will impact the relevant national currency. This is also the case for speculative traders using financial derivatives, such as contracts for difference (CFDs). When forex trading on a CFD trading platform, traders can use technical and fundamental analysis to speculate on both rising and falling markets.

As previously mentioned, the US dollar (USD) is considered as the world’s base currency, and any market movement on its value can have considerable impact on the major currency pairs.

A new US president, for example, can directly change the fiscal stimulus and amount of government borrowing. As a result, the central bank — in this case the Federal Reserve — can increase interest rates.

Let’s take the example of President Joe Biden, who is the 46th US president. During the period of his campaign and coming into office, it was the expectation that Biden would increase government spending and push for higher taxes on the richer population.

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As a result, the USD at this time fell to a dramatically low value, and the forex market experienced a bearish trend. In fact, the dollar reached the lowest level it had seen in years.

Therefore, traders can expect that during any US elections, the forex market can experience significant volatility.

The impact on commodities

The commodities market, and in particular oil, are heavily dependant on the process of supply and demand. Any imbalance between the two can drive prices up or down. When it comes to US politics, the government’s policies on renewable energy and the potential fees imposed on energy companies, can impact the movement in the market.

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For example, the market reacted to Biden’s plans to invest in green energy and re-join the Paris Agreement. Decisions made at the United Nations Climate Change Conference (COP26) in November 2021, held in Glasgow, will also likely have an impact on the oil market.

Another example of the impact of geopolitical events, was when the US imposed economic sanctions on Iran, which first took place in the ‘70s. Continuous sanctions and tension on the regions that produce oil, heavily influences the price of the commodity on the market. Crude oil, for example, would tend to increase in price if traders anticipate that their will be a cut to supply of the commodity from Iran.

New policies in the US can have a double impact, as can also affect the value of shares in the energy companies on the stock market. Taking the example of Biden’s new presidency again, during the aftermath of the election results, the stock market sentiment saw a shift from the tech industry to companies and shares for renewable energy, and electric car manufacturers.

The price of stocks

The US government can determine the way in which businesses operates in the nation. The regulations, fiscal policies, taxation and international trading relations can all have an impact on the abilities of businesses. This can affect all stages of the process from sourcing raw materials to distribution of their products.

As experienced traders would know, the performance of a company directly influences the value of its stock in the market. Likewise, if the US economy is doing well under a new presidency and policies, then the prices on the shares market also tend to boom.

During Biden’s campaign, it was believed that relationships could be repaired between the US and China, as well as the EU. This provided some calm in the stock market, and promised stability for stock traders.

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