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How Does Non-Farm Payroll Affect Forex Trading?

   

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Active forex traders are relentless when it comes to monitoring the various key economic indicators intertwined with the market. The reason for this is pretty clear: These indicators allow a trader to identify both minor and major trends with regard to economic growth. 

Key economic indicators that many advanced forex traders opt to monitor include the Consumer Price Index (CPI), housing stats, gross domestic product (GDP), personal consumption expenditures (PCEs), and the employment report. 

Across these indicators, the employment report arguably carries the most weight because it contains a wealth of statistics that allow traders to read between the lines when it comes to understanding the current state of the economy.


The Reason NFP Data Is Important

The employment report, which is released by the Bureau of Labor Statistics, contains information related to unemployment, job growth, and payroll data, among other key statistics. Data-wise, the most important stat that traders should take note of is the nonfarm payroll (NFP) figure. 

This represents the total number of paid U.S. workers of any registered business; exclusions to this figure include private household employees, employees of nonprofit organizations, general government employees, and—as you can probably already gather—farm employees. The reason traders choose to both acknowledge and scrutinize this data is that it provides a footing for identifying potential rates of inflation and the rate of economic growth.

 

When this report hits trading newswires on the first Friday of every month, market activity tends to rise, with nonfarm payroll data often having an impact on forex trading as a whole. What immediately jumps out is the fact that the data is timely, with the report’s calculations coming about through the monitoring of the employment practices of some of the largest corporations in the United States. 

The data is then placed alongside the unemployment rate, which is based on a household survey of employment. A trader can then draw an immediate correlation between the two, with the overall employment rate becoming apparent to a certain extent.

Although it may be debated in some circles (with some even labeling nonfarm payroll forex trading as a lagging indicator), the reason nonfarm payroll numbers have an effect on forex trading is that the job data interlinks with the ups and downs of the economy. When jobs are increasing in number, sentiment within the market generates momentum, with consumers having more disposable income and, thus, spending more. 

A great example of this bears out in the USD/EUR chart following the July 2019 employment report, which far exceeded estimates and signaled continued economic strength in the United States, which bolstered prices for the currency pair:

For more information on how the report was expected to affect the strength of the U.S. dollar, check out our video previewing the report and its possible implications:

By contrast, the January 2020 NFP data deepened pessimism regarding the strength of the U.S. economy. The USD/EUR chart below illustrates the U.S. dollar’s quick decline in value along with a longer, more gradual decline in the days after the report was released:

An increase in user spending has always been a factor behind USD performance, even if its impact is often understated. For this reason, job gains can definitely affect nonfarm payroll forex trading.

More recently, the March 2022 NFP report triggered a gradual decline in EUR/USD’s value. Fears of interest rate hikes fueled by lowering employment rates stoked concerns that monetary policy would be focused on controlling inflation and stabilizing the U.S. economy:

 

Although it seems counterintuitive that a strong jobs report would cause the value of the USD to decline, this change is because strong employment figures were viewed as more likely to trigger monetary policy and actions that, at least for the short term, could stunt the U.S. economy in exchange for more long-term stability.

The NFP Domino Effect

Nonfarm payroll data and related statistics can also cause a domino effect, which, in turn, will further affect forex trading and market performance. When job gains accelerate rapidly, the Federal Reserve can relate this data to interest rate changes, potentially pushing through an increase or decrease depending on the circumstances. 

As most already know, the Federal Reserve has a dual mandate when controlling monetary policy, which can mean that nonfarm payroll data can directly influence the biggest impact maker with regard to forex trading.

Forex traders face indicator after indicator when it comes to investing effectively; it’s sometimes an information overload. Personal spending and retail sales, along with the CPI and PCEs, have the power to alter the course of the capital markets. 

That being said, the significance of nonfarm payroll data and how it affects forex trading can’t be ignored.

Why All Forex Traders Should Pay Attention to Nonfarm Payroll Data

With so many sources of economic news and other indicators to follow, less experienced traders may wonder why NFP data is such an important resource to track. 

In reality, there are many reasons why nonfarm payroll reports are important to account for in your trading strategy, regardless of how you incorporate this information into your trades. These reasons include:

  • NFP data reflects sentiment, inflation, and growth potential all through a simple-to-read report. Few sources of data account for all of these data points and considerations and with accuracy that you can trust in your forex trades. 
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  • It offers some of the most up-to-date economic data available to forex traders. While some economic reports and other indicators are lagging, using data that may be weeks—or even months—old, NFP data is very timely and far more reflective of current economic conditions.
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  • NFP data is more straightforward and objective than other sources of economic data. While other data reports and indicators are prone to inherent or deliberate biases—or can be manipulated to produce the indications you’re seeking—NFP data is considered largely unbiased, making it easier to take this information at face value.
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  • Market fluctuations following NFP report releases can be a trading opportunity for some traders. If you seek out trading opportunities based on volatility, trades targeted around the release of the monthly NFP report can be one option for earning quick profits based on the anticipated price swings resulting from this report.

What to Look for in the Employment Report

Fortunately for forex traders, the employment report is fairly simple in terms of the data it offers and its possible implications on the strength of U.S. currency. In general, you want to pay attention to payroll figures and how many jobs are being added each month, but you’ll also need to balance these figures against the estimates leading into the report, which can place those payroll numbers into context and help you gauge the health of the economy relative to a wide range of moving variables.

In general, forex traders want to see payroll numbers grow by at least 100,000 in a given month. This is a sign of continued growth in the economy, and it can fuel bullish sentiments regarding the U.S. dollar. But you also need to consider these numbers within the context of the estimates going into the report. If the payroll increase amounts to 150,000 in a given month and estimates were only 100,000, this is a strong number. The payroll increase not only hit the ideal benchmark but also outperformed expectations.

On the other hand, if the estimate was 200,000 and the actual payroll increase is only 150,000, this can have an adverse effect on how forex traders feel about the U.S. dollar because it indicates economic struggles that weren’t necessarily anticipated.

Even though the payroll increase hit that target threshold, the lower-than-expected results can spark worry that unforeseen challenges are hitting the U.S. economy, which could trigger a USD sell-off.

Other Economic Reports to Follow

Even if NFP becomes your most trusted and emphasized U.S. economic report, other reports are worth monitoring and considering in your trading strategy—including for use alongside the nonfarm payroll report.

Reputable economic reports include:

  • Consumer Price Index: The CPI is considered one of the most important reports for forex traders to follow because of its strong influence on forex and stock prices. CPI illustrates the price of goods bought by consumers and can be a reliable tool for tracking currency inflation.

  • Purchasing Managers’ Index: This monthly survey of key economic sectors is an insightful reflection of how business leaders view the economy and their own companies’ fortunes in terms of future growth potential.

  • Gross Domestic Product (GDP) Report: While the quarterly GDP report can be closely correlated to the NFP report, it offers a very broad assessment of the U.S. economy and can be highly influential on both economic policy decisions and forex trader sentiments.

  • Consumer Confidence Index: Released at the end of every month, the CCI report is a broad measure of overall consumer confidence in the economy. The higher the CCI, the more confident consumers are in spending their money, while a lower CCI reflects consumer uncertainty about the future of the economy.

The employment report is just one resource that traders should rely on when evaluating forex trading options, but its influence on U.S. currency value, as well as the simplicity of its information, makes it a crucial resource to keep on your radar. Mark your calendar for when these NFP figures are scheduled to be released—they will often spark volatility in the forex market, which can create profit opportunities for attentive forex traders.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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