Can the 2014 World Cup Affect the Forex Market?

Adam Lemon

Could the 2014 FIFA World Cup opening in Brazil this week affect the global Forex market? It might seem a crazy idea on a par with traders using moon cycles to try to forecast market movements, but don’t dismiss the idea out of hand. A recent study by Goldman Sachs has concluded that the stock index of the winning country has on average outperformed global equity indices by 3.5% during the first month after the final, before underperforming the same measure by 4% over the following year! These are statistically significant numbers that should not be ignored. The concept is logical: a short-lived phase of football-related euphoria followed by a comedown. If such an effect has been observed in equity markets, there should also be an impact for Forex trading in the Forex market.

If you “get” football (as an Englishman, I would rather die than call it soccer), you probably won’t find this unreasonable. If you don’t, consider the well-known weekend effect that has been observed to warp stock market prices between Friday and Monday. Even today, these human factors can still affect market prices, at least over the short-term. I do not need any persuading, as I lived through two occasions where the English team failed narrowly to reach the finals of major football tournaments, once in the World Cup of 1990 and then again in the European Championship of 1996, going out to arch-rivals Germany on penalties both times. The sense of building euphoria as the team progressed further was palpable and had a visible effect in offices as well as in bars: people were happy, agreeable, and less skeptical than usual. Conversely, when the knockout blows came, a mood of depression and lethargy prevailed for several days. Of course, as the sport is more popular among men, the effect was more pronounced among the male half of the population: consider that despite the advances toward gender equality made over recent years, the financial services industry is still very male-dominated almost everywhere.

The Effect of the 2014 World Cup on Forex Trading

So, how might you profit in Forex trading from the results of the 2014 World Cup? My experiences as a trader and as a football fan lead me to suggest the following plan of action. Before the Round of 16 games, pay attention only to results of individual matches where there is a major upset which significantly changes the prospect of at least one team’s likely progression to the next round. Then during the knockout stages, pay more and more attention to each game with each progressive round. Teams that get a boost are places where you can look for longs when their national market opens after the match, shorting teams which are being eliminated. Each round will become more and more significant, giving better and better trading prospects. Of course, the best potential trade is likely to be long the winner of the final and short the loser.

To be sure, there are a couple of flies in the ointment when it comes to Forex and the 2014 World Cup. Firstly, the fact that nine of the teams, among them many of the best teams, all have the same currency (the Euro) might mean there is no practical trade you can take as a reaction to the performances by these teams. Either a match will be played between two Euro teams, or if a Euro team wins or loses against a non-Euro team, you cannot really assume the Euro will be impacted: it is bigger than one member nation, even a large one. The second problem is that your broker may not offer a trade in the exotic currencies of some of the non-European teams that are likely to do well, such as the Brazilian Real or the Argentinian Peso.

The best outcome to hope for in Forex terms would be an unexpected and dramatic victory by any of Australia, England, Japan, Korea and Mexico. They each have their own individual currencies, all of which (except for the Korean Won) are readily available at most Forex brokers, although the Mexican Peso carries a relatively high spread. The remaining currencies all have quite low spreads. The best bet of all would be a dramatic victory by England, which not only dominates the volatile GBP but is a truly football-crazy country. The GBP tends to start moving at around 7am London time so if England produce a shock, be ready to buy the GBP the next morning. But as an Englishman, conveniently, I’ll be hoping for that anyway!

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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