Elections have a significant impact on global financial markets, including foreign exchange rates. When significant political events occur, uncertainty can make markets extremely volatile, causing major forex pairs to experience wild price swings. But how much do elections actually move currencies, and when do those moves last long? The guide below will try to accomplish exactly that, analyzing historic evidence and showing how election cycles influence forex, and what traders and businesses can learn from the data.
Why election news matters to forex
The influence of election cycles is profound: not only can it change governments, but it also extends beyond breaking news headlines and has a serious impact on currency markets. Currencies are among the first markets to react to major election cycles. Expected policy changes and shifts in global risk appetite are all heavily uncertain before the election results are known. When investors fear instability, money flows to safe-haven currencies like USD, CHF, and JPY. When an election signals pro-growth policy changes and predictable governance, capital flows the other way. Even tiny shifts in polling can trigger major FX movements because currency markets price probabilities, not just outcomes. This is why major votes in the U.S., U.K., or EU often impact currency pairs days or even weeks before election night.
What research says about FX and election cycles
There are numerous academic studies, and most of them consistently show that elections leave a measurable mark on FX markets. But even without academic research data, just looking at the forex major pair charts during elections will make it clear how impactful elections can be. Let’s outline the main characteristics of election cycles’ impact on forex markets.
Voters can punish governments
Traders look closely at how policy mistakes or various government issues weaken the currency. As a result, they punish governments by reacting early to these inefficiencies and making currencies move even more dramatically. These risks can trigger massive depreciation of a currency and impact election results in democratic countries.
Volatility spikes around uncertain or surprising results
Event-study research shows that FX volatility jumps during close elections or unexpected outcomes. These spikes are usually short-lived, but if the election result indicates a major policy shift, then macro trends can be created that can last for months. One good example would be Trump’s tariffs, which made the dollar weaker, and the EUR/USD has been in an uptrend for several months, reflecting the importance of election cycles for currency markets.
Presidential election cycles show detectable patterns
Many studies that focused on the U.S. election cycles suggest the dollar tends to move differently depending on which party is in power. This pattern is often modest and overshadowed by other global events. The main lesson here is that the cycles matter, but they are not strong enough to trade blindly.
Economic and policy stakes determine the impact
Forex markets usually react strongly to elections that reshape agreements, fiscal rules, or monetary independence. As a result, if the newly selected power is going to cause major changes in the established economic order, the markets react violently and go that way in the long run, in a new trend. That’s why elections in the US or the UK have a larger global impact than elections in smaller countries.
Famous cases
There are very well-known cases that can be used as examples when we discuss elections and their impact on currency markets.
Brexit and the Pound
The Brexit referendum was not an election per se, but it was pretty close due to its significance and impact on forex markets. In June 2023 2016, the UK voted to leave the EU, and the British pound fell immediately. The fall was so dramatic that it caused a multi-year bearish trend for the pound (GBP). The reason is that the UK is deeply tied to the EU, and leaving it made investors lose their confidence in the UK.
U.S. Presidential elections
The U.S. dollar is heavily influenced by elections in the USA because of the dollar’s reserve currency status. In 2016, markets were caught off guard as no one anticipated Trump’s victory. USD fell initially and then surged again because traders expected fiscal expansion, tax cuts, and protectionist trade policies. Emerging-market currencies fell immediately due to fears of tariffs and capital outflows.
COVID-19 overshadowed everything, but the election still mattered in 2020. A Biden win increased expectations of stimulus, affecting the dollar. Risk sentiment linked to vaccines and recovery blended with politics made the forex reaction less dramatic but still noticeable.
2024 was another shock election. The outcome led to around 2% move in the dollar within a day. Across all three cycles, the conclusion is clear: U.S. elections move currency markets through expectations of traders and investors. The bigger the surprise, the bigger the FX swings.
