Discover what is NFP in Forex, how the announcement influences financial markets, and learn why the non-farm payrolls report is particularly important for your trading strategy.
The NFP report consistently causes one of the largest rate movements of any news announcement in the foreign exchange (forex) market. As a result, many analysts, traders, funds, investors, and speculators anticipate the NFP number and the impact that it will have on currency pairs, commodities, and stocks.
NFP in Forex Trading – Key Takeaways
What Is NFP in Forex?
The nonfarm payroll or 'NFPs', is a key economic indicator for the United States and represents the total number of paid workers in the U.S. excluding those employed by farms, the federal government, private households, and nonprofit organizations.
This is measured by the federal Bureau of Labor Statistics (BLS), which surveys private and government entities throughout the U.S. about their payrolls. The BLS reports the nonfarm payroll numbers to the public every month through the closely followed Employment Situation report.
The non-farm payrolls are usually released at 1.30 pm (UK time), or 8.30 am (EST) on the first Friday of every month and offer insight into month-on-month and year-on-year data. Month-on-month shows last month’s number compared to the prior month, while year-on-year shows last month’s figure compared to the same month a year earlier.
Traders and investors can keep track of the NFP report, as well as other important economic events, by using our Economic Calendar.
Why is the non-farm payroll report important?
The NFP report provides crucial insight into the condition of the largest economy in the world, revealing how US companies are performing and providing a hint as to the direction the Federal Reserve may take interest rates soon.
According to the Federal Reserve's mission on employment, the total number of jobs created or eliminated is a sign of the health of the economy. For these reasons, the FOMC will consider the NFP data when determining whether to raise or cut interest rates.
For instance, too many new jobs could indicate inflationary pressures, which could result in an increase in interest rates. Meanwhile, a decline in the number might be a sign of a struggling economy, raising the possibility of a rate cut.
The non-farm report can have a significant impact on the movements of currencies, equities, and commodities because interest rates have a significant impact on these markets.
How to Read the NFP Report?
Before the publication of almost any macroeconomic indicator, including the NFP, forecasts are collected from economists and market analysts. Below is an image of the August 2023 NFP release.
The three numbers are labeled Actual, Forecast, and Previous and the figures denote the number of new jobs created. ‘Actual’ represents the figures from the scheduled NFP report and, subsequently, remains blank until after its publication. ‘Forecast’ indicates the market consensus for the upcoming NFP figures and ‘Previous’ shows us the results from the last nonfarm payroll.
Source: CAPEX.com Economic Calendar
It is when the actual result deviates significantly from the forecasted figures that can pre-empt a significant reaction from the market. There are three ways to analyze the U.S. nonfarm payroll number.
1. NFP above market expectations
In general, a higher payroll figure is positive for the American economy due to more job creation and stronger economic growth. Investors and forex traders seek a monthly increase in employment of at least 100,000. Any announcement that is higher than that number and more importantly above the consensus expectation will support the U.S. dollar's advances.
If the NFP number comes above market expectations but the details of the report are weak (hourly earnings and unemployment), then the US dollar could make an initial spike up as Algos tries to take advantage of the headline number, only to completely reverse to its previous trading levels in the coming minutes.
2. NFP in line with expectations
The currency markets have a conflicting response to anticipated changes in payroll statistics. Forex traders who are expecting a shift in the NFP data will look to other subcomponents and elements, such as the unemployment rate and the manufacturing payroll subcomponent, for guidance or insight.
Currency traders will side with a stronger dollar if the unemployment rate decreases or manufacturing payrolls increase, which is good for the U.S. economy. Investors will turn away from the US dollar in favor of other currencies if the unemployment rate rises and manufacturing jobs decline.
3. NFP below market expectations
A worsening job condition is unfavorable for the dollar and the biggest economy in the world. The U.S. economy is likely to be stationary if the NFP data indicates a decrease of 100,000 jobs or less, and forex traders would favor higher-yielding currencies against the U.S. dollar.
If the NFP number comes below market expectations but the details of the report are strong (hourly earnings and unemployment), then the US dollar could make an initial spike down as Algos tries to take advantage of the headline number, only to completely reverse to its previous trading levels right after or when the US Markets will open (1 hour later).
Which are the non-farm payroll components?
There are many additional factors that can be just as crucial to pay attention to, even though publications typically utilize the headline NFP statistic. What else should you be on the lookout for?
The unemployment rate as a percentage of the overall workforce. This number is closely followed because it can affect how the Federal Reserve evaluates the US economy. Average hourly earnings. The result is the same whether workers are added to the workforce or released from it if there are the same number of jobs but lower average pay. Which sectors the increases and decreases in jobs came from. This provides traders with data on whether economic sectors are growing or contracting, which can be helpful for making future transactions. Revisions to previous non-farm payroll releases. This is a crucial element that has the potential to quickly shift market sentiment as traders adjust their growth projections considering the revisions.
What markets are affected by NFP?
Trading non-farm payrolls can present the opportunity for increased profits on a variety of markets, but the announcement can cause volatility, increasing risk.
Prior to the release, economists will attempt to predict what the headline NFP number will be, usually arriving at a consensus estimate. The market fallout from the release can then be magnified depending on the closeness of the estimate to the actual figure.
Some of the markets that are likely to be most affected are:
A healthy US economy will attract investment from around the word, driving up the price of the US dollar. This affects major currency pairs, such as EUR/USD, and GBP/USD.
If it looks like the US economy is performing poorly, traders may turn to safe havens, such as gold and silver.
Strong employment is a sign that businesses are doing well – but a strong dollar can negatively affected US indices such as Dow Jones, the S&P 500 and the NASDAQ.
NFP Forex Trading Strategies
Payrolls can cause significant movements in the financial markets, both up and down, because so many traders and investors are following this data release. It all depends on how closely the actual amount matches expectations made before the announcement. As a result, many forex and indices traders find the payrolls to be a popular trading opportunity.
When it comes to trading the NFP in forex, a variety of methods are employed. Popular techniques include fading the initial move and trading the trend.
Fading the initial move
One NFP forex trading strategy is to wait and observe how the markets respond to the news. When the data is first released, there may frequently be a knee-jerk reaction because market movements can be unpredictable. By using a strategy known as "fading" the opening move, this can be avoided.
Assume, for example, that payrolls have exceeded estimates and will consequently increase the US dollar's value relative to a basket of other important currencies (US Dollar Index), such as the Euro. Instead, the moment the announcement is made, the EUR/USD exchange rate surges, and the Euro first climb considerably higher versus the dollar.
Waiting for this initial surge to fizzle out, which may only take a few minutes, is the first step in fading such a move. Following that, traders might short-sell EUR /USD by setting a stop-loss order above the rally's high. The trader is assumed to be anticipating a return to the market's position just before the announcement of the non-farm payroll figures.
This also applies if the market declines sharply after the release of the number. Before opening a buy position with a stop-loss order below the most recent low, it would be helpful to wait and observe if the market pauses.
Trading the trend
Another NFP forex trading strategy involves traders assuming that the first market response was accurate. One presumption is that the market's sudden movement following the announcement of the non-farm payrolls signals the beginning of a trend for the following trading day.
To validate a new trend, traders frequently tend to look at earlier reference points. Has the move, for instance, surpassed the peak from yesterday? If true, some would see this as a substantial shift in market mood and predict a rise in the markets.
Another strategy is to execute a trade just before the number is published. Despite the potential for a big profit, this is somewhat of a "coin-flip" in market direction because the markets occasionally respond at first in an unexpected way. If that point of view turns out to be inaccurate, risk management allows you to close the position.
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Final Thoughts about NFP in Forex Trading
While the market volatility surrounding the release of the NFP and employment data presents a chance for traders to try and make a profit, it may also quickly lead to a losing position. Therefore, it's crucial to pay close attention to your risk management strategy.
There isn't really a magic solution for trading non-farm payrolls. Due to the volatility, it may result in a significant short-term profit, but there is also a chance of sizable short-term losses, therefore placing risk-management orders can be quite helpful in this situation. If you have never traded the non-farm payrolls, you can begin by doing so in small increments with the proper stop-losses in place to safeguard your position.
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