Whether or not you’ve been trading binary options for quite some time or you are a new trader, you’ll probably realize that the value of assets change in line with political events across the globe. When trading options on currency pairs, in particular, you’ll see that if a major political event happens in a country, it typically has an impact on the local economy. When this happens, the local currency is often affected and, for those of us trading binary options will have an impact on the value of a currency pair.

Political events happen all the time and sometimes aren’t heavily predictable for those of us in the markets. There are some events, such as a change in the political party leading a country or government policy that are known, causing speculation in the market and anticipation. This, in effect, creates a lot of commentary by market analysts that then influences the value of currency pairs. As a new government or policy is implemented and the economy starts to feel the effects, currency pairs will also move in line with these changes.

However, political events can also surprise many of us in the markets and are often related to political instability in a region. If a war breaks out in a country or tension rises between two countries, this unsettled behavior can impact the value of many financial assets but have a special effect on the value of forex binary options. Since currency pairs compare the value of one currency against another, values will rise or fall in line with how one country’s economy is effected to the political instability compared to another. Regardless of the political event, all of these events have the capability to create a change in the value of currency pairs.

Why do political events influence the economic stability of a country?

Since we live in a global economy, many countries rely on trading relationships with other nations. For instance, over the past three years, there has been rising political tension in a range of oil-producing countries in the Middle East. This, in turn, has created a lot of volatility in the value of oil, with it rising to 5-year record highs due to worries of restricted supply. If supply of oil falls globally, this places pressure on the value of oil but can also impact the value of currency pairs, particular the U.S. dollar.

Generally speaking, an increasing oil price results in increasing inflation, which negatively impacts the global economy, particularly oil-dependent economies such as the U.S. Apart from increased transportation, heating and utility costs, higher oil prices are eventually reflected in virtually every finished product, as well as food and commodities in general. Since the U.S. has enjoyed inexpensive oil-based energy for a long period of time, this is one of the prime factors behind its prosperity. So, if supply of oil declines, oil prices rise and the U.S. dollar typically rises.

From a trading perspective, when political events occur, it typically creates uncertainty throughout the global market and could cause traders to reevaluate where to invest their funds. If funds are moved into other economies, this also can have an impact on forex currency pairs, as traders are seeking out alternative methods for returns on their investment.

Example – Major Monetary Policy Changes Cause a Rise in the USD/JPY

After a number of years of struggling to dig itself out of a deflationary state, the Bank of Japan (BoJ) announced a new monetary policy to stimulate the Japanese economy. The goal of this was to improve its exports, overcome deflation and regain its presence as a global producer of high quality goods. The new monetary policy released in 2013 by new Prime Minister Shinzo Abe was focused on providing unlimited quantitative easing until targets were reached. Abe introduced a number of policies that helped to make Japan a more attractive place to buy products from, effectively creating a situation where the value of the Japanese yen fell against many major currency counterparts. For instance, since these monetary policy changes have been made, the USD/JPY currency pair (USD per Japanese yen) has increased to highs of 105.30 from 2-year lows of 77.61 just before the change of government occurred in September 2012. This highlights how the introduction of a policy can have a positive effect on another currency such as the U.S. dollar, effectively reducing the value of the Japanese yen.

Example – U.S. dollar falls in October 2013 following government shutdown

From October 1st – 16th, 2013, the U.S. federal government entered a shutdown and curtailed most routine operations after Congress. During the shutdown, approximately 800,000 federal employees weren’t working. A funding-gap was created when the two chambers of Congress failed to agree to an appropriations continuing resolution. When it comes to the markets, this obviously created concern and political instability for those trading on U.S. financial assets. As a result, forex traders saw unstable times for the U.S. dollar. For instance, the USD/JPY currency pair (USD per Japanese yen) was trading at 98.40 on October 1st dropped to a 9-month low of 96.90 on October 9th and the increased back up to 98.94 a day after the shutdown ended on October 17th. This demonstrates how a political event that creates a high level of uncertainty can cause the value of a currency pair to fall.

Political Events as Binary Options Signals

As you trade binary options, it’s important to keep an eye on political events as they can provide you with information to execute your trades. If you are trading forex binary options, you need to keep up-to-date on economic activities that are occurring in the local economies of the currency pair. If you notice volatility or political tension in a market, it is likely to spark a change in the value of a currency pair. Even if a situation in a country isn’t volatile, any political event is likely to cause some movement in the value of a currency pair as it typically will create some analyst speculation and, subsequently, stimulate or detract support for that currency pair.

If you are trading forex binary options, stay aware of political events so you can ensure you understand how they influence your currency pairs. As you trade options on currency pairs, monitoring political events can help you to execute your trades successfully. Using tools, such as GlobalOption’s weekly reviews. our Journal and news can help you monitor these events so you can improve your profitability over time.