Unemployment and Jobless claims
We all very familiar with the term unemployment and what it means, but not everyone knows its importance and how it is stated to affect the economy of a country and its currency. For a trader, the term unemployment is incredibly necessary as it reveals something about the current state of z nation’s economy. This article looks at how the jobless claims data can impact the currency prices by taking some real case studies.
As we all know, the jobless claims are said to be lagging indicator meaning the indicator changes only when the economy has undergone changes and is reflected in those numbers. After its every release, it causes a lot of market volatility since this information alone influences economic stability, monetary policy, and interest rates in the upcoming bank’s decision making.
Those liberals who are formulating these policies are wise enough to predict which sector is going to lose most jobs shortly. However, it is essential to make a note that initial jobless claims data should be compared on a year-to-year basis to negate the internal effects of seasonality, monthly and weekly numbers may not give the actual trends most of the time.
Impact In the FOREX Market
The unemployment stats of a nation can never be ignored, as addressed above it has the power to change the minds of decision-makers, policy formulators, and the determining cash flow, so the matter of the subject is enormous. The following are the three examples of what the initial jobless claims can mean for the currency prices in today’s forex market.
More Than Expected
If the initial jobless claims are too high, then the government tries to stimulate the depressed economy by creating jobs and bringing out some tax-free schemes for the poor. In the U.S., the Federal Reserve will reduce the federal funds rate, expanding the monetary policy. If this fails to lift the economy, then the federal government will employ fiscal policy measures, hire people for public works projects and somehow try to create demand with tax benefits. When such a situation of higher claims occurs if a lot more than usual then—it negatively impacts the USD, triggering a bearish turn. A recent example of this happened at the end of 2017, U.K.
Unemployment went up ten basis points to 4.4%, which saw the GBP/EUR dip to 1.3944 and GBP/UD fell to 1.3918 The big investors here a remain diligent and cautious about the economy and are always on the back foot when it comes to putting their money in these countries. As there is a lot of fear among the traders, they start to take off the money from the economy, which makes the currency value to depreciate against other currencies.
Lower than expected
A lower than anticipated numbers typically lead to more workers that earn income and more consumption expenditure. This can cause inflationary pressure, which then causes the interest rate to rise. Unemployment at high levels caused lower income, a drop in economic activity and decreased consumption. A reduction in initial jobless claims, however, is positive (bullish in forex terms), as was recently seen in Japan. Earlier in 2018, the jobless claims fell to 2.4%.
After this data came out, the USP/JPY fell to 105.96 as the JPY jumped in value by 0.22%. The investors get a feeling of safe haven in these types of good economies, so their confidence increases. Owing to this factor, more and more people show very active participation from big HNI’s to small retail investors. As a result of which takes the currency to higher levels and the money, overall starts to appreciate and remains in this fair value as long as the financial situation is stable without any disappointing numbers.
Initial jobless claims data below usual
Joblessness cannot be sustained for a long time beneath the ‘usual rate of unemployment,’ as this would produce higher inflation and consequently force the Federal Reserve to raise the federal fund’s reserve rates all in order to trigger growth. The usual rate of unemployment has traditionally been estimated to be at 5.5%, which is claimed to keep the currency in its ‘good’ range without losing much of its value. But a lot of discussions been swirling around for the accuracy of this figure in recent times.
Conclusion
The initial jobless claims are incredibly crucial to forex traders as it is very efficient in indicating how the policy will react to labour market conditions. Monetary policy changes or even a lack thereof can always lead to the value of currency heading up or down. While it might be considered only a throwaway number at times, often when there is even a small shift in the number, there is no denying that the initial jobless claims can impact the currency prices.
