Forex Traders Guide To NFP (Non-Farm Payrolls)

The Non-Farm Payrolls (NFP) report is an economic indicator measuring employment change within the United States.

Each month, NFP shows the net change in the number of paid employees, excluding specific sectors like the farming industry and non-profit organizations.

Why should you even care about NFP? Because it is one of the most traded events on the economic calendar and provides essential insights into the strength of the US economy.

Since this is a US data release, it is self-explanatory that the most affected Forex pairs will involve the USD, such as – EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, NZDUSD. But due to the magnitude of this event, it can be felt across all currencies and financial markets.

Forex Traders Guide To NFP – Overview

  • When does the release happen?
  • What does the data mean for the economy?
  • Why does NFP affect currency valuation?
  • How will Forex Traders react to different outcomes?
  • Trading this event.

When does the release happen?

Generally, the report comes out at 08:30 a.m. Eastern Standard Time (EST) on the first Friday of every month.

Due to anticipation, prices usually don’t move much a few days before the event. Traders tend to wait until NFP and then react to the price action of the market. Therefore close to, during, and after the release, you can expect increased market volatility.

Below is an example of the market movements that can occur because of Non-Farm Payrolls. Price fell over 100 pips within 1 hour.

 

Market reaction to NFP – USDJPY H1

I must warn you to look out for high spread costs around this time because of the spike in volatility. Nobody wants to end up risking more than they bargained for. 

What does the data mean for the economy?

As already mentioned, the NFP report tells us how many jobs were created or lost from month to month. But why is this considered such a crucial indicator of economic strength? Job growth means that consumers have more money to spend, and consumer spending is the economy’s main driver. 

A high (strong) report – If many jobs are added, this is bullish for the US economy. Consumers have more money to spend, which means greater economic growth potential.

A neutral (consensus) report – Usually, prices won’t move a great deal if the data is near the expected consensus.

A low (weak) report – If few jobs are added, this is bearish for the US economy. Consumers have less money to spend, which hampers economic growth.

Many Forex traders neglect that when the Non-Farm Payrolls number is given, several other key employment statistics are released, such as average hourly earnings and the unemployment rate.

Participants will also consider these when determining their directional bias i.e. you should not just look past them.

Why does NFP affect currency valuation?

I wouldn’t blame you for asking why NFP impacts the Forex market? It all boils down to the main driver of currency valuation, INTEREST RATES.

The Fed looks at two main indicators when making policy changes, employment and inflation. Since Non-Farm Payrolls is the star of the labor statistics show, it is rather important.

Furthermore, we already discussed how strong employment equals more spending, which then leads to higher inflation.

Bear with me here…

  • NFP has a direct effect on employment statistics and an indirect effect on inflation.
  • The two main factors the Fed looks at when determining interest rates are employment and inflation.
  • Interest rates drive currency fluctuations.

 

Hopefully, you can understand why the report is so closely watched.

 

To avoid any confusion, let me link the NFP results to interest rates:

A high (strong) report – High job growth means a strong labour market and likely rising inflation. In this case the Fed would hike rates leading to a strong dollar (bullish).

A neutral (consensus) report – Moderate job growth and inflation usually means that the Federal Reserve will keep policy as is.

A low (weak) report – Low job growth means a weak labor market and, likely, deflation. In this case, the Fed would cut rates leading to a weaker dollar (bearish).

Remember, participants will choose a currency with a higher interest since this provides a better yield (ROI).

How will Forex Traders react to different outcomes?

The main consideration when analyzing the NFP report, or any other economic event, is the forecast (consensus) vs. the actual release.

When looking at an economic calendar from DailyFX, ForexFactory, or FXStreet, the forecast is what economists and analysts believe the data will be. This prediction is already priced into the market long before.

The actual number is then provided at the scheduled time. Market participants react to this piece of information. If the discrepancy is large, the reaction will be significant; if it is small, the response will be minor.

Differences in the forecast and actual data can also have bullish or bearish implications – A better than expected NFP report is good for the USD, a worse than expected NFP report is bad for the USD.

You have probably already figured it out, but I will repeat to make sure we are on the same page – Traders react based on the difference between the forecast and actual numbers. The difference determines how severe their reaction will be, and the type of report (a higher or lower reading than expected) determines the direction of the currency.

Trading this event

1. Breakout news trading

Before a major event, traders are usually wary of opening significant positions. As a result, the market often moves sideways and creates a range.

You can approach this range like any other and open a position when price breaks through support or resistance. The only difference is because of the headwinds from the NFP release, you can expect more follow-through.

  1. If price is range-bound before the announcement, draw in support and resistance levels.
  2. NFP data is released.
  3. Place a buy trade if the market breaks through resistance or a sell trade if price moves through support.

 

NB – Make sure to wait for confirmation from candlestick closes or price action

 

Bullish breakout trade – GBPUSD H1

 

Bearish breakout trade – EURUSD H1

2. Retracement news trading

Here we have another simplistic approach. After critical economic indicators, price could move significantly in a certain direction. Probabilities usually favor the continuation of this move, so it is a smart idea to be a part of it.

What is the best way to join the potential trend?

  1. NFP data is released.
  2. Wait for a retracement of the initial spike.
  3. Look for candlesticks or price action confirmation.
  4. Place a trade in the direction of the NFP move.

 

You can wait for a normal retracement or even use your Fibonacci drawing tool.

 

Fibonacci retracement trade – EURUSD H1

 

Trading news is not for everyone, and I would caution all new traders to start by trading a system. If this is not your cup of tea, then that’s ok. Nevertheless, it would be best if you still kept an eye open for NFP to manage your risk and positions effectively.

Of course, you could also trade NFP based on fundamental analysis if that suits your personality and style.

Conclusion

I should mention that Non-Farm Payrolls does not generate the large short-term moves that it once did, but it is still one of the most hyped events on the calendar.

Hopefully, you now have a firm understanding of this economic indicator and why Forex traders pay so much attention to it. If you found this article useful, please share it with your trading friends.

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May NFP be with you.

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