Unemployment rate represents the number of people in a given country actively searching for jobs but cannot find any and this is expressed in a percentage.
Unemployment leads to less disposable income to spend on investment and consumption. As a result, it reduces taxes paid to the government in form of revenue and increases more government expenditure.
When this happens, there is a slow down in economic development due to a fall in demand for both domestic and imported products, fall in government revenue and low investment. This may call for the central bank to cut its interest rate to encourage cheap borrowing which increases spending and demand hence business development leading to increase in demand for workers.
How Unemployment rate affects the Forex market
When unemployment rate is less than expected, it shows a reduction on the number of people unemployed in a country’s economy which is an indication for a future economic growth. This attracts more investors in the country and is likely to be followed by a rise in interest rates.
As the country’s economy shows signs of boom, the currency also appreciates in value following growth in the economy. As the currency appreciates, the market becomes more bullish due to more buyers getting in the market.
On the other hand when the unemployment rate is more than expected, it is an indication for increase in the number of jobless people in that country which leads to a slow down in economic development. This may be followed by the cut of interest rates by the central bank to encourage domestic expenditure.
As a result, the currency falls in value and most investors start selling off their assets to invest in more productive economies. The forex market will go more bearish due to more traders selling off the currency in question.
How to trade forex using Unemployment rate data
After the news release, if the news shows more than expected, it indicates a poor economy due to increase number of jobless people in that economy. This will reflect a fall in value of the currency. Sell the currency in relation to the other paired currencies.
When the news show less unemployment rate than expected, it shows a reduction on the number of jobless people in that economy which is good for the currency. Buy the currency in relation to the other paired currencies.
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