Have you ever wondered what an unemployment rate is? What does it mean? Why is it important and how does it influence Forex traders (also known as currency traders)? Those are all very important questions I will answer on this page.
What is an Unemployment Rate?
An unemployment rate is a fundamental economic development that represents the percentage of a population that is unemployed. So if there is a country with a population of 100, and 7 out of the 100 are without employment, then the unemployment rate for that country is 7 percent; 7 percent is the percentage of the population that is unemployed.
Beware, for there are some countries that don’t use their total population when determining their unemployment rate. Some may use a subgroup within their total population. For example, some countries may use a subgroup of only those who are unemployed but are actively looking for employment when determining their unemployment rate. The reason for that is to excluded those who are willingly and purposely unemployment so that the unemployment rate doesn’t become skewed. Some agree with that type of filtering, some don’t. I am undecided.
Here’s an example of how an unemployment rate would be affected if a country decided to use such a subgroup. If there is a country with a population of 100, and 7 are unemployed, but 4 out of the 7 are unemployed and are actively looking for employment while the other 3 aren’t looking for employment, the new unemployment rate would be 4 percent instead of 7 percent.
Whether a country uses its total population or some subgroup, the unemployment rate gives everyone some insight on a country’s economic health. A high unemployment rate implies poor economic health and an increased likelihood for economic contraction. The inverse is also true. A low unemployment rate implies good economic health and an increased likelihood for economic expansion. So if you’re ever wondering how a country’s economy is doing, take a look at its unemployment rate. The strength of a country’s labor market is a very strong indicator of a country’s overall economic health.
Usually the lower the unemployment rate is, the more people that are working, earning an income and spending money. That would equate to a lively, bustling economy. The higher the unemployment rate is, the less people are working, earning an income and spending money. That would equate to a weakening economy. You see? One stat offers great insights.
The Unemployment Rate and Forex Traders
Now that you have a basic understanding of what the unemployment rate is, now it’s time to explain why it is important to Forex traders. Many Forex traders, including myself are very interested in fundamental economic developments that can influence central bankers to alter monetary policy.
Why? Because changes to monetary policy can have a significant impact on currency pair trading prices. Changes in currency pair trading prices can lead to profit or losses depending on a trader’s position. So it is important that a Forex trader performs fundamental analysis and monitor stats like the unemployment rate.
If the unemployment rate is low and the labor market is robust, then there is a high probability that the central bank with monetary policy authority over the economy will enact contractionary monetary policies to combat inflationary pressures. Contractionary monetary policies tend to strengthen a currency, so Forex traders would look to position themselves accordingly while being mindful to conduct technical analysis.
If the opposite were to happen and a country is experiencing a high unemployment rate and the labor market is faltering, then there is a high probability that the central bank would look to implement expansionary monetary policies. Such policies would weaken a currency causing it to devalue relative to other currencies and commodities. A Forex trader would have to make sure that one positions one’s self appropriately to be able to profit from a weakening currency.
I hope you see why Forex traders value the unemployment rate. It allow us to determine how monetary policy will change in response to labor market conditions. Monetary policy changes or even a lack thereof can lead to currency valuation changes. And it is in those currency valuation changes where Forex traders profit or lose.