The unemployment rate is a strong indicator of a country’s economic strength. When unemployment is high, the economy may be weak and its currency may fall in value. The opposite is true as well. Many economists look for answers to the question “What is a country’s full employment capacity level?” That knowledge will give clues to the peak in productivity and economic output. That also helps determine a country’s capital flows and is, therefore, good information for currency traders to follow for longer-term trend identification. The unemployment rate measures the number of unemployed as a percentage of the nation’s workforce. Nonfarm payroll employment tallies the number of paid employees working part time and or full time in the nation’s business and government sectors.
There are several components that are also included in the employment report. One is the average hourly work week; that figure reflects the number of hours worked in the nonfarm sector. Another component is the average hourly earnings; it shows the hourly rate that employees are receiving. There are two versions of this report. One is a weekly report that is released every Thursday morning; and the other, the more influential report, is the monthly figure that is usually released on the first Friday of every month. The fear when we are at or near “full employment is that employers might have to pay overtime wages to their existing workforce and use higher wages to bring in new workers from the competitor. This action can raise labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and the bond markets. Federal Reserve officials are always on the lookout for inflationary pressures. In August 2006, the monthly employment report showed a less-than-expected increase in new jobs. This gave a hint to traders that the Federal Reserve might halt its interest-rate-hiking campaign. That so-called campaign took the Fed funds rate from 1.0 percent to 5.25 percent with a record-setting 17 consecutive interest-rate adjustments. When the market thought the Fed was done due to the potentially weakening jobs market, the dollar fell sharply and foreign currencies exploded in value in short order. The British pound chart in figure below shows a 15-minute time period, one of my favorite time periods to watch for trade signals. The bullish indicators, as represented by the triangles that are pointing up, generated buy signals before the report was released and would have given an extremely profitable trade. The explosive behavior of the market’s reaction was due to the sentiment that the Fed would change its interestrate policy from a tightening mode to a neutral watch-and-review mode.
British Pound Explodes on Employment Report
The next figure shows the euro currency. Utilizing the same time period as in figure , a 15-minute chart, we have similar buy signals generated before the report. It was the internal technical condition of the market on not one but two “like” or tandem markets that signaled that a change might take place in the value of these currencies.
Euro/U.S. Dollar (15-minute buy signals)
As the charts show, a major change in fact did take place; the euro rocketed to the upside, generating over a 170-PIP profit per position in less than one hour. If you examine the two charts closely, you can see that while they both generated buy signals, both were at or near their pivot point support levels; but the trend in the British pound before the report was in an upward direction and the trend in the euro was in a declining mode. What is interesting about this observation is that some traders were bound to be selling prior to the report, possibly because they were unaware that a significant report was due out or that it was an important enough event to warrant attention or because they were not looking at the same specific technical techniques.