The unemployment rate is basically the percentage of the people in the workforce without jobs but is able and willing to work.
It is measured by getting the ratio of unemployed people who are willing and able to work versus the total number of people in the workforce.
It is important to discern between people who are unemployed and those who are simply not working. Some people may be studying, working from home, handicapped, or retired. These people are not part of the workforce and are not included in the unemployment rate.
Importance of Unemployment Rate
The unemployment rate is considered a lagging indicator.
This means that it only changes after the underlying economic conditions of a nation have already changed. The unemployment rate could cause moderate market volatility because it provides traders clues about future interest rates and monetary policies.
Market Impact of Unemployment Rate
Lower than expected unemployment rates tend to appreciate currencies because traders believe that it could lead to higher interest rates. Alternatively, greater than expected unemployment rates could weaken currencies as it is expected to lead to lower interest rates.