Many of us are familiar with the concept of “unemployment rate,” and data on the unemployment rates of the US, Europe, etc., are always important news with significant impacts on the Forex market. However, few may truly understand what the unemployment rate data means and why it is so important.
For a Forex trader, the unemployment rate is extremely important because it reveals something about the current state of a country’s economy. The following article will help you examine how the unemployment rate can impact currency prices.
Contents
What is the Unemployment Rate, and how does it affect things?
What is the unemployment rate?
The unemployment rate is the percentage of unemployed individuals in a country’s labor force.
These individuals are those capable and ready to work but have yet to find a job. It’s important to distinguish between people who are unemployed and those who do not work. Some people might be studying, disabled, or retired – these people are not considered part of the labor force, so they are not included in the rate.
Why is the unemployment rate important?
The unemployment rate is known as a lagging (slow) indicator, meaning it only changes after the economic condition of a country has changed. This can cause market volatility, as it provides clues related to economic stability, future monetary policy, and interest rates.
Policy makers use unemployment statistics to see which sectors are losing jobs faster than others. However, it’s crucial to recognize that the unemployment rate should be compared year on year to offset the inherent impacts of seasonality, while monthly comparisons might not accurately indicate real trends.
When is the US unemployment rate published?
In the US, the unemployment rate is published in the Non-Farm Payrolls report. Non Farm (Nonfarm Payrolls – NFP) is also known as the US non-agricultural payroll report.
Publication time of Nonfarm: It is regularly published on the first Friday of the month, at 19:30 (summer time) or 20:30 (winter time) Vietnam time.
Data in the Nonfarm report: A Nonfarm report will include 3 data points, which are:
- Non-farm Employment Change: the number of jobs in the industrial and service sectors created in the previous month.
- Unemployment Rate: the percentage of the labor force that is unemployed but still actively looking for a new job in the previous month.
- Average Hourly Earnings: the rate of income change in the previous month.
The impact of the unemployment rate on currency prices
The unemployment rate of a country should not be overlooked. As mentioned above, it can be a statistic related to economic activity. In general, when you review this information each month, compare it with the forecasted index. For example, for data from the United States:
- Actual Unemployment > Forecast: Negative news, worse than expected, will affect the USD, causing USD/XXX pairs to Decrease, and XXX/USD pairs to Increase.
- Actual Data < Forecast: Positive news, better than expected, will lead to a strong increase in the USD or the USD/XXX pairs will Increase, while the XXX/USD pairs will Decrease.
But why exactly is this the case? Let’s analyze this further:
Higher than Expected Unemployment Rate
A high and prolonged unemployment rate severely damages consumer sentiment, thereby affecting consumer spending and economic growth.
If the unemployment rate is too high, the government will try to stimulate the collapsing economy by creating jobs. In the US, the FED would lower the federal funds rate, expand monetary policy.
If these measures don’t stimulate the economy, then the Federal Government will apply fiscal policy measures, hiring people for public construction projects, or stimulate the economy with unemployment subsidies. In summary, when the unemployment rate rises – especially if it happens unexpectedly – it will negatively impact the USD, causing a downtrend.
For example: At the end of 2017, the UK’s unemployment rate rose 10 basis points to 4.4%. This caused the GBP/EUR rate to drop to 1.3944 and GBP/USD to 1.3918.
Lower than Expected Unemployment Rate
A lower than expected unemployment rate often leads to more employed workers with incomes and increased consumer spending. This can cause inflationary pressure, subsequently increasing interest rates. => Positively impacting the currency value.
High unemployment rates cause lower incomes, reduced economic activity, and decreased consumption. However, a decrease in unemployment rates is positive (or an increase), as recently seen in Japan. For example, at the beginning of 2018, Japan’s unemployment rate dropped to 2.4%. After this news was published, the USD/JPY rate fell to 105.96, as the JPY increased by 0.22% in value.
Below the Natural Rate of Unemployment
However, when analyzing unemployment rates, remember: NOT ALL LOW UNEMPLOYMENT RATES ARE GOOD.
Imagine, suppose the unemployment rate is extremely low, or = 0. What would happen?
If no one (or very few) is unemployed, then in any industry that needs more labor, employers will struggle to find workers. They will have to continually raise wages to attract labor. If wages increase => costs increase => the price of goods and services increase => causing inflation, which is not good for the economy.
Therefore, for a stable and long-term economic development, a natural rate of unemployment must always be maintained. There is no specific number that defines the natural rate of unemployment, but usually, 5.5% is considered appropriate (although there has been much debate about the accuracy of this number).
Related post:
- What is RSI Indicator? Guide to using RSI for Effective Trading?
- What is Retail Sales? Understanding its impact on Forex Market
It is clear that the unemployment rate is extremely important news for any Forex trader. Therefore, monitoring the economic calendar and updating information on the unemployment rate is essential. In general, just remember: A higher actual unemployment rate than forecast is considered negative (depreciation), while an actual rate lower than the forecast will be seen as positive (appreciation) for the currency value of that country.
