(Un)Expected Political Outcomes and Currency Markets 

Abstract

This paper investigates post-electoral drift in the foreign exchange market, distinguishing between expected and unexpected political outcomes. Using large language models (LLMs) to analyze news articles, we categorize political outcomes as expected or unexpected. Our analysis reveals a notable 2.3% currency appreciation following political events, with stronger drifts observed when outcomes are unexpected, indicating that markets react to the resolution of uncertainty. We identify that economic instability, market reactions, globalization, and geopolitical tensions drive the most substantial appreciation. Corporate trading, particularly net buying by firms, plays a pivotal role in shaping the post-event drift. This appreciation is more pronounced for currencies with lower media sentiment and higher economic policy uncertainty. Moreover, exchange rates exhibit an asymmetric response to political ideology, with unexpected victories by left-leaning parties leading to stronger currency appreciation.

Keywords: JEL Classification: F31, G12, G15 Elections, referendums, unexpected, foreign exchange market