Unemployment Rate and Its Correlation with Currencies Trading

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The unemployment rate is usually treated as a lagging indicator when we’re talking about economic condition of a country. It’s basically the percentage of jobless people in the work force but is able and willing to work. The number is calculated by comparing these people with the total number of people in the work force. Please note that they’re different with those who are studying, working from home, retired, or handicapped because these people are not included in the unemployment rate.

The unemployment rate is a critical statistic used by the government to measure the health of the economy. If the rate is too high, the government will try to encourage the economy by making new jobs and lowering the funds rate. If it doesn’t work, then the government will use fiscal policy measures or directly employ people for public works assignments.

It’s important to understand that some level of unemployment will always continue living in an economy. It’s called as a natural rate of unemployment in every economy which is commonly influenced by public policies like minimum income and generous unemployment benefits which are discouraging job creation. The natural rate of unemployment is usually set at about 5.5%. To get a real picture of unemployment, it’s important to make a year-over-year basis comparison report, instead of a month-on-month basis report.

As a lagging indicator, the unemployment rate will only change after the current economic conditions have already changed. It could make moderate market volatility since traders will treat it as a hint to predict the future interest rates and monetary plans.

In general, the unemployment rate rises during cyclical recession and falls during periods of hasty economic growth. The number of jobless people will be a signal of the overall economic health, because consumer spending is highly connected with labor-market conditions. In the U.S., the Department of Labor releases the Unemployment Claims. It measures the number of people who filed for joblessness insurance for the first time during the past week. A lower then forecasted number will be a good signal for the currency.

A rising in unemployment rate is commonly treated as a bearish or a negative signal for the currency because it will lead to lower interest rates. A declining number in unemployment rate tends to increase currencies. It means that there are more people with better income, so it will increase the consumption spending which is lowering the inflation, and causing the interest rates to climb.

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