Unemployment rates affect Forex since they reflect value of the currency.
After the news release, if the rate is more than expected, it indicates a weak economy due to increase number of jobless people in that economy.
Unemployment rate is the percentage number of people in a given country actively searching for jobs but cannot find any.
These people are able and willing to work but can’t find employment. Either they are temporarily laid off, been continuously searching for jobs.
There is a big difference between the unemployed and those who are simply not working.
Some people may be studying, working from home, disabled or retired. These people are not part of the work force and are not included in the unemployment rate.
Therefore to come up with an unemployment rate, take the number of unemployed workers and divide that by the total civilian labor force.
How unemployment rate affects the economy
Unemployment rate is a key way to measure the state of the economy.
The unemployment rate is a “lagging indicator,” meaning the rate continues to go up, even after the economy improves.
It takes a while to start to fall, and a while to rise back up after economic shifts. It therefore gives confirmation of what the other indicators are already showing.
According to the U.S. Bureau of Labour Statistics(BLS), when workers are unemployed, their families lose wages, and the nation as a whole loses their contribution to the economy.
Unemployment leads to less disposable income to spend on investment and consumption.
As a result, it reduces taxes revenues and also increases more government expenditure.
When this happens;
- There is a slow down in economic development due to a fall in demand for both domestic and imported products,
- Loss of individual income hence poor standards of living
- Fall in government revenues and low investment.
- Reduces individual expenditure and consumption
- Increases government expenditure and borrowing
As a result,this may call for the central bank to cut its interest rate to encourage cheap borrowing to boost spending and consumption in the economy.
How Unemployment rates affect Forex market
The unemployment rates affect forex therefore is an important indicator.
The Federal Reserve uses to determine the health of the economy when setting monetary policy.
It is also an important tool after NFP that most traders always look into to make trading decisions.
When the unemployment rate is less than expected,
it shows a reduction on the number of people unemployed in a country’s economy. This is a good indication for a future economic growth.
Investors may seek investment opportunities in that country, causing a rise in the value of that currency.
This is likely to be followed by a rise in interest rates.
As the country’s economy shows signs of boom, the currency also appreciates in value following growth in the economy.
Subsequently, the market becomes more bullish due to more buyers getting in the market.
On the other hand when the unemployment rate is more than expected,
it is an indication for increase in the number of jobless people in that country. This portrays signs of a weak economy.
Investors are likely to seek opportunities elsewhere, and so the currency may depreciate.
In addition, the Central bank may cut its interest rates to encourage domestic expenditure.
As more Investors pull off from the economy , the currency continues to depreciate.
The Forex market will go more bearish due to more traders selling off the currency in question.
How to trade forex using Unemployment rate data
After the news release,
if the rate is more than expected, it indicates a weak economy due to increase number of jobless people in that economy.
This will reflect a fall in value of the currency.
Sell that currency in relation to the other paired currencies.
On the other hand,
when the rate shows less than expected, it shows a reduction on the number of jobless people in that economy.
This indicates a strong economy and currency appreciation.
Buy that currency in relation to the other paired currencies.
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