What is the Employment Report in the Forex Economic Calendar?
Employment is crucial to consumer spending, which accounts for more than two-thirds of GDP in many countries. Understanding the employment rate and its domino effect on the economy is significant for fundamental analysis. Factors affecting employment rates and business cycle patterns, inherently affect a country's economic growth and currency valuation. Hence, understanding employment as an economic indicator strengthens our analysis.
Contents
What is the Employment Rate?
The employment rate is defined as the ratio of employed people to the total available labor force. Here, the labor force is the total number of employed and unemployed people. Unemployment is when a person actively searches for a job but cannot find one. The unemployment rate is also defined as the percentage of unemployed people in the available labor force. The employment and unemployment rate must add up to 100% because it equals the total available labor force.
How can Employment Rate numbers be used for analysis?
Employment and unemployment can be seen as two sides of the same coin. We can derive our fundamental analysis from any direction. The employment rate is essential to our analysis because it directly and consequentially affects consumer spending. In the United States, consumer spending accounts for about 70% of total GDP.
A high employment rate indicates that more people in the labor force have income they can spend on buying goods and services. When consumer spending rises, businesses thrive, leading to better wages or even more employment. Generally, employment in a sector has an indirect positive effect on related sectors and a direct positive effect on the economy.
The government is also politically committed to ensuring a low unemployment rate. Otherwise, citizens will not support them in the next elections. By adequately supporting local businesses, the government can increase employment in the short term. The high unemployment rate is very harmful to the economy. As more people are unemployed, it has a direct negative impact on consumer spending. In this scenario, the domino effect works and worsens the situation and harms the working people.
Employment and unemployment rates can also help investors keep a pulse on the economy's health. Generally, ensuring that the employment rate is always high and does not decrease is necessary. Even when the unemployment rate increases linearly, it has an exponential effect on economic growth, hence central authorities try to avoid it all the time. It is also significant to understand that the employment rate is sensitive to business cycles in the short term. Thus, seasonally adjusted versions are more useful for analysis. In the long run, employment rates are significantly affected by government policies on higher education and income support. Policies focused on the employment of women and disadvantaged groups also help to increase the employment rate. If economic growth is the main concern, the governments of developing and underdeveloped countries should focus on educational policies and job opportunities for their workforce. Literacy and higher education in underdeveloped and developing countries have helped economies grow stronger year after year.
Employment rates are contemporaneous indicators and can also be used to predict or confirm future periods of recession or recovery. The beginning of a recession is accompanied by widespread unemployment or a decrease in the employment rate. Hence, despite media and government propaganda, employment data helps confirm whether the economy is growing or stagnating. Accordingly, during recovery periods, the employment rate returns to its previous normal state on the recovery path.
The Employment Rate's Effect on a Currency's Value
Since growth in the employment rate leads to a growing economy, a high employment rate is a plus point for a country's GDP and currency. An increase or decrease in the employment rate indicates the improvement or deterioration of the economy, respectively.
Forex market traders monitor the unemployment rate more carefully than the employment rate. Significant changes in the unemployment rate have a significant impact on market volatility. However, generally, the employment rate alone is a low-impact indicator compared to the unemployment rate. Statistics of changes in employment and unemployment claims also precede the unemployment rate, and the effects of these statistics apply before the announcement of employment rates in the market.
Employment status reports
The BLS surveys and tracks monthly domestic employment and unemployment in the United States. The report categorizes them by geographic location, gender, race, industry, etc. The BLS publishes the Employment Status Report, and its history goes back to the 1940s. Also, the BLS publishes this statistic at 12:30 UTC on the first Friday of every month.
How the Employment Rate news release affects the price chart
As noted earlier, an increase or decrease in the employment rate can help measure how well or poorly the economy is doing. Therefore, forex traders need to understand how the news release of this macroeconomic indicator affects the price performance of various currency pairs.
In the United States, monthly employment reports usually release on the first Friday after the month ends. New, expected figures and all histories are on the Forex Factory website. Below is an image of the US unemployment rate from the Forex Factory website. On the right, we can see a description that shows how much the fundamental index affects the respective currency.
As shown, the unemployment rate is a highly influential indicator. The image below shows the change in the US unemployment rate released on August 7, 2020, at 12:30 GMT. For July 2020, the unemployment rate fell from 11.1% to 10.2%, beating the 10.5% forecast by analysts.
Let's see how this news release has affected the Forex price charts.
The 30-minute timeframe chart of EUR/USD shows that the market is in a bearish trend from 02:00 to 12:00 GMT, with candles forming below the moving average. Additionally, the market was trading in a narrow price channel between 1/1850 and 1/1810, indicating a quiet market with traders waiting for the latest employment data to assess economic recovery.
As shown in the chart above, immediately after the news release, we can see a sudden downward movement after the price correction. This sudden movement and price correction show that the market has reacted differently to the positive news of employment and the dollar's strength.
After the initial move, the market can "absorb" positive news. This currency pair continued the downward trend by breaking and stabilizing the price below the resistance 1.1810 level observed earlier. Since the currency pair did not show any sudden unexpected fluctuations before and after the release of the new rate, trading on the news could be profitable.
Let's see how this new news affected other major forex currency pairs.
The GBP/USD currency pair showed a similar trend to EUR/USD. We can see that this currency pair was traded in the price channel of 1.3122 and 1.3071 from 07:00 to 12:00 GMT. After the economic data release, the currency pair experienced a similar sharp decline. Then, with the break of the support and trading below it, it adopted the same bullish position of the EUR/USD currency pair.
Similar to the currency pairs EUR/USD and GBP/USD, AUD/USD was also traded in the 0.7221 & 0.7196 price channels and did not have unexpected upward movement before the news release. After the news is released, a sudden drop with a correction is observed, and then the pair takes a bullish stance below the broken support level.
From the above analysis, the market's low volatility before the employment data release and the high volatility afterward makes the unemployment rate an influential indicator predicted by forex traders.
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