Non-farm payrolls (NFP)
What are they?
On the first Friday of every month, US Department of Labor will release an official statistic which reports the number of people currently in employment in the US and the US unemployment rate. They are usually released at 8.30am (EST) on the first Friday of every month and offer insight into month-on-month and year-on-year data.
Why are they important?
As the name suggests, the NFP does not measure employment in the agricultural, local government, private household and not-for-profit sectors. The numbers released in the report show the previous month’s employment trends. It is a key economic indicator of the US economy.
What to look out for in the report?
- The headline payroll number: This is the total monthly increase or decrease in paid U.S. workers (excluding government employees, private household employees, employees of nonprofit organizations that provide assistance to individuals, and farm employees).
- The unemployment rate and wage data: Any changes to previous reports will also be indicated, and depending on those changes can have an effect when combined with the current month’s numbers.
How does NFP affect Forex
When the report differs from the expectations or economists’ estimates, the Forex market will react. Lower results than economists’ estimates will likely see Forex traders sell U.S. dollars, in anticipation of a weaker currency. Similarly a higher than expected result will effect a reverse move on the market.
The report is also used to identify inflation and economic growth or contraction trends. An expanding payroll usually is an indication of economic growth. However if it is growing too fast, this may indicate coming inflation and considered a warning.
How to trade the non-farm payrolls report
- As the NFP release has generally caused volatility in the market, traders can take the trading opportunities that come along around the release date.
- Depending on your expectation of the result, you may take a position on the US dollar or US indices. Currency pairs that include the US Dollar are most affected by the data release (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and others).
- Nonetheless, currency pairs not related to the US Dollar could also see increased volatility and widening spreads.
Though the NFP report is an important indicator, one should remember that it is just one data point to incorporate, While the NFP generally moves the market, data like CPI (inflation), Fed funds rates, and GDP growth are important data releases too. The markets are made up of several inputs that combined will all have an effect.
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