The non-farm payroll (NFP) figure is a lead economic indicator for the United States economy. It represents the number of jobs added, excluding farm employees, government employees, private household employees and employees of nonprofit organizations.
NFP releases generally cause a large movement in the forex market. The NFP data is normally released on the first Friday of every month at 8:30 AM ET. This article will explain the role which NFP’s play in economics and how to apply NFP release data to a forex trading strategy.
HOW DOES THE NFP AFFECT FOREX?
NFP data is important because it is released every month, making it a very good indicator of the current state of the economy. The data is released by the Bureau of Labor Statistics and the next release can be found on an economic calendar.
Employment is a very important indicator to the Federal Reserve Bank. When unemployment is increasing, policy makers tend to have an expansionary monetary policy (stimulatory, with low interest rates). The goal of an expansionary monetary policy is to increase economic output and decrease unemployment.
So, if the unemployment rate is higher than usual, the economy is thought to be running below its potential and policy makers will try to stable and stimulate it. A stimulatory monetary policy entails lower interest rates and reduces demand for the Dollar (money flows out of a low yielding currency).
The chart below shows how volatile the forex market can be after an NFP release. The expected NFP results for March 8, 2019, were 180k (job additions), the actual result disappointed with only 20k jobs being added. As a result, the Dollar Index (DXY) depreciated in value, and volatility increased.
Forex traders must be worried about data releases like the NFP. Traders could get stopped-out due to the sudden increase in volatility. When volatility increases, spreads do too, and increased spreads can lead to margin calls and it’ll kill a small account.
WHICH CURRENCY PAIRS ARE MOST AFFECTED BY NFP?
The NFP data is an indicator of American employment, so your currency pairs that include the US Dollar (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and others) are most affected by the data release.
Other currency pairs also display an increase in volatility when the NFP releases and traders must be aware of this as well, because they may get stopped out. The chart below shows the CAD/JPY during the NFP data release. As you can see, the increase in volatility could stop a trader out of their position even though they are not trading a currency pair linked to the US Dollar.
NON-FIRM PAYROLL RELEASE DATES
The Bureau of Labor statistics normally releases the NFP data on the first Friday of each month at 8:30 AM ET. The release dates of NFP can be found on the Bureau of Labor Statistic’s website.
Due to the volatile nature of the NFP release, we recommend using a pull-back strategy rather than a breakout strategy. Using a pullback strategy, traders should wait for the currency pair to retrace before entering a trade.
Using the same example as above (NFP results in 20k vs 180k expected) we expect the US Dollar to depreciate. In the example below, we use the EUR/USD. Because the NFP data came out worse than expected, we forecast the EUR/USD to appreciate.
TRADING THE NFP DATA RELEASES: TOP TIPS & FURTHER READING
Here we are giving a few tips to remember when using NFP data releases to inform your forex trading:
NFP data is released on the first Friday of every month.
The NFP data release is accompanied with increased volatility and widening spreads.
Currency pairs not related to the US Dollar could also see increased volatility and widening spreads.
Trading the NFP data release can be dangerous due to the increase in volatility and possible widening of spreads. To face this, and to avoid getting stopped-out, we recommend using the appropriate leverage, or no leverage at all.
Other important data releases to watch:
While the NFP generally moves the market, data like CPI (inflation), Fed funds rates, and GDP growth are important data releases too.
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