The Impact of Non-Farm Payrolls

In the US, consumer spending accounts for almost two-thirds of the GDP. That's why job data is so crucial for traders and investors. For currency traders worldwide, non-farm payrolls (NFP) are a critical economic indicator. Investors and Forex traders anxiously await the NFP report from the Bureau of Labor Statistics (BLS). 

NFP releases its monthly report on the first Friday of each month at 8:30 am EST. Traditionally if the 1st falls on a Thursday, it moves over the following Friday. The report includes data about the total number of employees of the private sector in the US, excluding government offices, private households, nonprofits, and agriculture. 

In addition to this, the report provides comprehensive data about inflation, consumer demand, and economic growth in the US. US dollars serve as the world's reserve currency since they are the world's largest economy. 

Besides being tied to the currencies of other countries, commodities such as oil and gold are priced in US dollars. It is therefore imperative to keep an eye on the NFP report, which is a very crucial release to watch. The Non-Farm Payrolls report affects the Forex market, equities, treasuries, and commodity market. In the wake of the NFP report in the United States, the Forex markets have become very volatile.

Non-Farm Payrolls report’s impact on the US dollar

The NFP report usually indicates how many new jobs have been created in the economy. Furthermore, it is a measure of the purchasing power of consumers. Boosting the US dollar is always related to increasing consumer spending, although the impact of the NFP is often underestimated. The report is released every month, which is considered a good indicator of the country's economic health. 

An increased number of jobs created is always a positive sign for the economy. However, if the unemployment rate is higher than usual or expected, the Fed may think of lowering the interest rate, which increases the economy's output and employment levels. 

Low interest rates and accommodative monetary policy, which stimulates the economy, lower the demand for the US dollar. Hence, it becomes the reason which weakens its relative value against other currencies like Euro and the Japanese Yen. Hence, the US dollar depreciates against other major currencies whenever the labour market is weak.

In contrast, strong jobs data increases the Fed's probability of increasing interest rates, which is optimistic for the US dollar. There are several other factors in the NFP report that the investors should consider before investing in the Forex market. An unusual increase in the number of jobs may lead to an increase in inflation at some points. The Fed is responsible not only to monitor employment and economic growth but also to curb inflation. 

NFP Report impacted currency pairs

Each currency pair that involves the US dollar is affected by the American employment indicator. USD/JPY, EUR/USD, AUD/USD, and USD/CHF are among the most prominent examples. The NFP data release may also increase the volatility of other currencies, such as the CAD/JPY.

In other words, the possibility exists for a trade to go off course. In addition, spreads may widen, resulting in additional margin calls. 

How are NFP releases responsible for volatility? 

The Bureau of Labor Statistics explains that the difference between projected and actual figures measures the impact of NFP data. Forex traders pay very close attention to the difference between these two figures. 

Traders sell the US dollar when the real data is lower than expected, anticipating a weaker economy. After that, the traders tend to shift towards the other high-yielding currencies. 

Often, markets react differently to adjustments that are expected, resulting in a mixed reaction. 

Traders usually examine other economic data to gain better insights. Most traders consider the economy growing if it adds at least 100,000 jobs. In addition to the NFP, the traders also examine other reports such as retail sales, CPI, and the manufacturing index. Here are some highlights 

ISM manufacturing survey

It doesn't give actual numbers, but it gives an idea of where the economy is heading. It indicates that employment rates are on the rise whenever the index is above 50. 

Jobless claims 

Traders compare NFP data with weekly unemployment benefits claims. In spite of the fact that it does not affect the Forex market, it is an excellent tool for investors in macroeconomic analysis. 

ADP employment report

The report released two days prior to the NFP gives an indication of how the private sector is doing. Accordingly, the ADP should be regarded as an indication of the actual NFP release. 

Household survey

Taking place on the same day as the NFP, this report presents the unemployment rate. As a percent of the total labour force, the number of job seekers indicates how many people are seeking jobs. The NFP, however, determines this in a separate way, combining the number of employed and unemployed individuals.  

Forex volatility: how traders approach it.

During the release of these reports, most experts recommend staying out of the markets. There is usually a spike in volatility in the short-term, followed by a normalisation of price after.

This is normally the best route to go. Wait it out!

Those that are brave enough to take the bull by the horns usually take a planned approach. This is an advanced approach and should be carefully planned.

Currency values may rise or fall immediately after this news release, indicating where the pair might go. This is dependant on the outcome of the NFP numbers.

Generally speaking, if the price moves “x amount” of pips after the numbers are released, traders who follow technical analysis would start to look for various continuation or reversal opportunities. However, some might already have pending orders in place for entry and exit.

NFP – To Trade or Not to Trade

This NFP report has a profound influence on the United States and the Forex market since it plays a major role in the appreciation and depreciation of the dollar. You have to place the right stop-loss orders at the right time to protect against market fluctuations.

With an economic calendar, it's easier to track economic releases such as NFP. By making use of these important economic reports, traders can better decide whether or not to trade.