Forex Unemployment Rate

When we say Forex unemployment rate, we’re referring to how currency markets react to unemployment rate data.

This is one of those concepts which is very self-explanatory, but just in case, we have to cover this basics:

Unemployment Rate

To measure how an economy is doing, economists gather a good amount of statistics with which to compare how things are going now versus in the past.

Of those statistics, three are more important for Central Banks, as they can impact monetary policy decisions, and thus, currency price.

Unemployment is one of these three big variables Central Banks pay attention to.

But what is unemployment?

From the population, we take a subgroup of people who are willing to work.

This group of people who want to work is either working already, or looking for work (unemployed).

Sucks, doesn’t it?

The Forex unemployment rate is what this later group (unemployed) represents of the group of people willing to work.

Notice that there are people willing to work, but not currently searching for a job.

These people are not considered unemployed since they’re not searching (doesn’t seem right? I didn’t make the rules…)

Either way, this unemployment rate is bad if its too big.

And it’s good for the economy if its low or close to natural unemployment.

If it’s lower than natural unemployment, then the economy is running too hot, and inflation may get out of hand (Central Bank needs to hike rates).

If unemployment is too high, then the economy is too slow, inflation is not picking up (growth likely isn’t either), and thus, the Central Bank may need to lower rates to stimulate the economy.

Got that?

Let’s answer the following definition real quick before moving on to market effects of the Forex unemployment rate.

Natural Unemployment

Let’s say natural unemployment in the United States is 5%.

This means the economy should have 5% of the workforce unemployed in equilibrium.

Ok, but what does that mean?

It means that under the most auspicious conditions, 5% of people should be unemployed.

But why? Shouldn’t everyone have a job?

No. Unemployment isn’t all bad.

There’s structural, and frictional unemployment (and cyclical too, but that one isn’t necessary from a perfect-world point of view).

By frictional and structural we have people changing jobs or waiting for a job that better matches that individual’s skills (frictional).

Not all friction is bad.

A good skill-job match benefits the economy in the long term (this isn’t BS I’m spouting out of nowhere, its backed by research economists).

Thus, its normal (and good) for people to wait for opportunities with a better match.

Similarly, structural unemployment occurs when the economy evolves and new/different skills are required.

For example, skills required in the manufacturing sector changed drastically with the implementation of automation (low-skill, repetitive task jobs being slashed).

But this meant a reduction in costs (and thus end-user price), as well as opening-up opportunities for more highly-skilled workers in the same industry (or requiring workers to retrain in a different industry).

When we look at the economy as a whole, neither of these things is bad. On the contrary, they’re necessary.

So now you know, if unemployment is below natural rate, economy too hot (this isn’t good).

Conversely, unemployment higher than natural rate means economy isn’t ideal (but if it’s much higher than natural unemployment, then the economy is too slow).

So how does this affect FX trading?

More On Forex Unemployment Rate

The Forex unemployment rate doesn’t care THAT much about natural unemployment in a country.

What it does care about is how the unemployment rate has been behaving lately.

Is it worse?

Is it better?

To answer those questions, you have to know what the previous period’s rate was, and where the current rate stands relative to natural unemployment.

A simpler route, however, might be reading the news on Central Banks, and the governor’s views on the unemployment rate.

Maybe… this sucks more?

If a Bank considers unemployment (and thus the labor market) to be in great condition, then it might not care as much about this.

If on the other hand, a Central Bank wants to see a tightening of the labor market before raising rates, then you need to pay attention to this data release.

Like all other tier 1 data releases, the importance of the unemployment rate will vary depending on how much focus a Central Bank is paying to it in a given moment.

And that’s all you really need to know.

See you soon,

Emil Christopher,

The Forex Economist

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