Unemployment is an important issue in every country in the world. It is one indicator that represents real economy, as opposed to mere numbers shown in GDP and other economic datas.

Unemployment is an important issue in every country in the world. In unemployment rate, lays the key to people's prosperity and satisfaction. Moreover, it is one indicator that represents the real economy, as opposed to mere numbers shown in GDP and other economic data. Decision-makers in the government and the central bank use unemployment data to ascertain their current position and plan future programs.

unemployment in forex

What is Unemployment Rate?

Unemployment rate is one of the economic indicators that measures the percentage of the workforce that is not currently employed and actively seeking employment, compared to the total labor force during a certain period. Hence, if you lose your job but are not actively seeking work, you are not included in the calculation of the unemployment rate.

It is important to note that the term "workforce" here does not include students, workers with special needs, freelancers, or pensioners.

To generate the unemployment rate,  the International Labour Organization (ILO) apply a standard with this formula:

Unemployment Rate = (number of unemployed individuals actively seeking employment) / (total workforce) x 100%

 

Why is Unemployment Rate Important?

Unemployment has far-reaching repercussions. More people unemployed means that there will be less spending.

In investment-driven economies, rising unemployment signals a distressed economy where investors are moving away from the country's financial market, and so, people could expect slower growth in the next period.

In consumer-driven economies, such a case would create poor business climate and slow GDP growth.

In countries with high jobless benefits like UK and US, high unemployment would burden national budgets as more money will be needed to pay benefits.

As such, an increase in the unemployment rate usually pushes down the currency's value and vice versa.

 

Unemployment Rate in the US

Every month, the US Census conducts a survey that includes respondents from nearly all major industries in over 250 metropolitan areas. With a sample of 60,000 households, or approximately 110,000 individuals, interviews are conducted in person, either directly or over the phone. Additionally, there is another survey that examines data from 160,000 companies.

The unemployment rate is considered a lagging indicator because it reacts after changes in economic conditions. The number of unemployed individuals will not increase immediately after an economic recession occurs.

Similarly, when the economy begins to recover, the number of unemployed individuals can still increase. This is because typically, large companies lay off workers several months after the economic situation worsens and then start hiring again once they are confident that the economy has entered an expansion cycle.

Some examples are:

  1. In the United States, the actual recession began in the first quarter of 2008 when GDP dropped to 1.8%. However, the unemployment rate only rose to 5.5% in May 2008 and peaked at 10.2% in October 2009 after the recession had ended.
  2. In the 2001 recession, the unemployment rate increased from 5.6% in 2002 to 6% in 2003, even though the recession had ended in 2002.

 

The Relationship between US Unemployment Rate and the USD

The unemployment rate indicator and the strengthening of the US Dollar have a negative correlation. If the unemployment rate is lower than expected, the US Dollar tends to strengthen.

Why?

Because the market believes that a decrease in unemployment will boost workers' income, drive consumer spending, and stimulate inflation.

Ultimately, this can lead to considerations by the Federal Reserve to increase interest rates. Given that factors related to tight monetary policy relatively support the interest of USD buyers, it is not surprising that a lower-than-expected unemployment rate indicator would help the US Dollar to be bullish.

On the other hand, higher-than-predicted results tend to weigh on the movement of the US Dollar because an increase in the unemployment rate can lead to a decrease in income, weakened consumer spending, and a slowdown in economic activity.

An example of this correlation can be seen in the movement of the US Dollar Index from 1993-2002. Compared to the orange line which represents the fluctuation of the US unemployment rate, the price tended to move in the opposite direction.

US Unemployment Rate

 

UK Experience in Addressing Unemployment

The UK central bank, the Bank of England, has used unemployment as a reference for interest rate decisions. In late 2013, they said that they were going to consider increasing interest rates only if unemployment touches the 7% threshold. This was because the UK had been fighting against high unemployment rates. If they increased interest rates carelessly, then the domestic cost of production will rise. Consequently, companies may consider firing some of their employees in order to ease production costs.

 

The unemployment rate is just one economic indicator that cannot be solely relied upon to predict price direction. You need to understand the "big picture" in fundamental analysis to implement it in forex trading. Now, the simple rules can be found in Macro Trading: A Fundamental Approach to Your Strategy.