Which of the following is a potential outcome of economic sanctions affecting FX markets?

Economic sanctions are restrictive measures imposed by one or more countries against a targeted country, group, or individual, typically to change behavior or policies. When such sanctions are enacted, they can lead to significant disruptions in the foreign exchange (FX) markets.

Market instability and unpredictability arise because economic sanctions can severely limit the ability of the affected country to engage in international trade or to attract foreign investment. This can lead to rapid fluctuations in currency values as market participants react to news and changes in economic conditions.

Moreover, the imposition of sanctions can create uncertainty about the long-term viability of the currency in the market, as stakeholders may be unsure how the sanctions will impact the country’s economic health or its ability to service debt obligations. This can result in increased volatility and erratic price movements, compelling traders and investors to proceed with caution.

The other options do not align with the typical consequences of economic sanctions. For instance, increased foreign investment is unlikely in countries facing sanctions, while greater currency stability often follows solid economic foundations rather than instability from sanctions. As for more favorable trading regulations, sanctions generally lead to stricter, not more favorable, regulations that can further inhibit trade.