How Unemployment Rate Affects the FOREX Market
Though many have heard of the unemployment rate, only a few actually know how it all works and why it’s important for forex and currency traders to know all about it. The unemployment rate is incredibly important, as it reveals the current state of a nation’s economy.
What Is the Unemployment Rate?
The unemployment rate represents the percentage of people without a job in a given country’s workforce. The people accounted for here are still willing as well as able to work at a job, even though they are unable to find employment.
The unemployment rate a lagging indicator when it comes to the economy, meaning that it changes after the economic state of a given country has already changed. However, the unemployment rate doesn’t have to be a lagging indicator when translated to the FOREX markets. News and reports of a change in the unemployment rate could cause market volatility as it indicates the state of the economy.
Unemployment Rates and the Forex Market
The unemployment rate of a country shouldn’t be ignored by the traders. There are two common examples of how the unemployment rate can be looked at and what it means for the currency prices.
Rate is higher than predicted
If the unemployment rate comes out to be higher than the predictions, the government will have to stimulate the depressed economy by creating new jobs. Let’s use the US as an example. In this case, the Federal Reserve will have to lower the federal funds rate. If this fails in stimulating the economy, then the Federal Government will have to employ fiscal policy measures, such as hiring people for public works projects or stimulating demand with unemployment benefits.
When the unemployment rate rises, it negatively impacts the USD, most likely triggering a bearish turn.
Rate is lower than predicted
When the unemployment rate is lower than expected, the economy will encounter more workers that earn income as well as more consumption expenditure. This could lead to inflation, causing interest rates to rise. A drop in the unemployment rate is a positive occurrence for both the economy and the FOREX market, as the currency will most likely increase in value.