Microeconomic Indicator in FOREX:
What is the Unemployment Rate?
Unemployment is defined as the situation, where people in the country do not have a daily job and are keenly looking for one in the past month. Employees who were laid off due to less availability of jobs and are expecting to get work somewhere are also considered while calculating the unemployment data. Also, not everyone who doesn’t have a job is unemployed. People who have all the skills to work and are willing to work but unable to find a job are only considered as unemployed. The Unemployment Rate is nothing but the percentage of unemployed workers in the total existing labor force.
The Unemployment Rate is a lagging indicator. This means, it doesn’t cause any economic event but it is the aftermath of it, like recession, etc. This helps us to confirm what has happened in the economy. When the Unemployment Rate is more that means there are a lot of unemployed people in the country. This means people will have very less money to spend until they find a job. Thereby, consumer spending reduces which is one of the economy’s key drivers of growth. This situation reduces the business revenue and forces companies to again cut down its employees to manage their costs.
How does Unemployment Rates affect the economy?
If the unemployment rate of a country is low, it means the economy of that country is strong. Stronger economy by default increases the demand for that nation’s currency. Lower unemployment rates can also directly impact the value of the currency. This happens because, investors tend to invest their money in countries with strong economies with the low unemployment rate, thereby causing a rise in the value of that country’s currency. Contrarily, country’s with high unemployment rate indicates the weakening economy of that country. This will have a negative impact on the country’s currency as investors tend to seek opportunities elsewhere and thereby the currency value of that country depreciates. Generally, if this unemployment rate is above 6% it affects the economy.
Reliable source of information on ‘Unemployment Rate’ for Major currencies:
There is a lot of information with respect to the Unemployment Rate in the sources provided below. You can familiarize yourself with the Unemployment Rates of the respective country along with the historical data related to that country’s Unemployment Rates. You can also compare the Unemployment Rates of one country to the other using this web portal. The graphical representation of the historical Unemployment Rates data will give you a clear understanding of how the country’s Unemployment Rates changed over time. You also get to change the graphical representations according to your preference. A ton of more information related to the latest news in that regard is provided to give you a better understanding.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/unemployment-rate
JPY – https://tradingeconomics.com/japan/unemployment-rate
What do traders care about the Unemployment Rate and its impact on the currency?
We know that the currency of a country depreciates if the rate of unemployment increases. So traders prefer to be cautious on trading currencies of a county in which there is a high unemployment rate year-on-year. Also, traders prefer to avoid trading with depreciating economic countries and we all know that high unemployment rate can weaken the economy. The job creation is one of the most important leading indicators of consumer spending. This accounts for a majority of the overall economic activity. Even if the unemployment rate is generally considered as a lagging indicator, it is an important signal of overall economic health. Because consumer spending is highly correlated with labor-market conditions.
How do Central Banks use Unemployment rate statistics?
The central banks use the unemployment rate data to measure the health of the economy. If the unemployment rate is abnormally high (anything more than 6%), it indicates & suggests the government to create more jobs to control the rate of unemployment. The central bank will primarily work on the expansionary monetary policy and lower the federal funds rate. Central banks also will use expansionary fiscal policy. This can create employment as the government hires a lot of unemployed people for public projects. This can also indirectly create employment in the long run by stimulating demand with extended benefits for unemployed people. These benefits will support people without jobs until they find one.
Frequency of the release
Unemployment rates are reported by the Bureau of Labour Statistics on the first Friday of every month. It helps the government in comparing the historical data. Governments generally compare this month unemployment rates with the same month of the previous year. They also do a year-over-year comparison. Governments do this to eliminate the effects of seasonality. For instance, if they only compare this month’s unemployment rate to the last month’s, there are high chances of it being higher because of it being the last month of the financial year or school year end, etc. which is more likely to slightly increase the unemployment rate.
The Bottom Line
Unemployment is an issue which is as serious as inflation. It is often underrated as it doesn’t cause any economic catastrophe. But if ignored, it can cause huge damage to the country’s economy. Horrendous situations like social unrest, dissatisfaction and strong negative impact on businesses are caused by high unemployment rates. An active trader should consider looking at the trending data of the unemployment rates to get a clear understanding on how the country’s economy is doing and it is advisable to take trading related decisions based on that along with various different factors.