There are certain potential events political or economic which have a direct impact on the foreign exchange of that currency. The instances, although maybe far in between but they can really shatter the currency on the Forex market.
One of those potential events that we have seen in the recent times is the Brexit. In order to study the impact of Brexit, it is crucial to ascertain what it is and how it affects the value of the currency. Not only is it a perfect fit to explain this concept, it is a real-life example that has worried a lot of traders as well.
Real-life Example of Potential Events
The British pound (GBP) has been the most developed currency since the Brexit referendum. However, as you would expect, there has been an uncertainty regarding the UK’s economic relationship with the European Union (EU) and other trading partners in the world. Let’s study the effect of Brexit on the GBP trading on the fundamental level.
Traders who rely on the technical analysis don’t get to experience the wrath of the potential events and the release of statistics because they have no concern with the fundamentals. However, the asset prices move on the basis of the economic influences in the long-run. When the referendum was conducted, the GBP dropped significantly against the USD. The happening or non-happening of the event kept the traders indifferent even though the major perception was that the event might take place.
Besides the majority of the perception, there was also a speculation about what the effects would be if the deal is not closed. This made the authorities analyze the impact it would have on the exports and the overall GDP of the country.
Thus, the potential events should be dealt with caution. Similarly, coming to the release of statistics, this relates with the fundamentals. Fundamental traders look for this type of information to analyze the health of the economy and forecast the future movements of the currency of the specific country. Most of the times, this is done for both the currencies in the currency pair so that the move could be made accordingly. The biggest example of the statistics is the NFP (non-farm payroll). The NFP report causes large movements in the Forex market because of the news associated with it. Because of its release, many traders, analysts, investors, and speculators anticipate the NFP number and the directional movement it will cause. The NFP is mostly released for the US economy.
The higher the NFP is, the better it is considered for the economy and ultimately the trades are made on the basis of it. It should also be noted here that once a potential event becomes more likely to happen, it may also be reflected in the NFP report. The NFP highlights some specific robust economic growth such as the decreasing unemployment rate, increase in the value of currency, or others. These elements are a good sign and increase the currency’s value.