NFP and Forex Trading: KEY POINTS
- Non-Farm Payrolls (NFP) releases cause fluctuations in the forex market.
- NFP reports net changes in employment jobs.
- Forex traders use an economic calendar to prepare for NFP releases.
WHAT IS THE NFP?
The non-farm payroll (NFP) figure is a major economic indicator for the US economy. It shows the number of jobs created, excluding workers in farms, government, private households and non-profit organizations.
NFP releases usually trigger large movements in the forex market. The NFP data is typically released on the first Friday of every month at 8:30 AM ET. This article will explain the role NFPs have in economics and how to use NFP release data to design a forex trading strategy.
HOW DOES THE NFP AFFECT FOREX?
The Non-Farm Payrolls (NFP) data holds immense significance as it is regularly published on a monthly basis, rendering it a highly reliable gauge of the current economic conditions. The Bureau of Labor Statistics is responsible for its release, and individuals can find the next publication date on an economic calendar.
Employment figures carry paramount importance for the Federal Reserve Bank. In times of elevated unemployment rates, policymakers often adopt an expansionary monetary policy, characterized by low interest rates and measures aimed at stimulating the economy. The primary objective of such a policy is to boost economic output and enhance employment opportunities.
Hence, when the unemployment rate surpasses its usual levels, it signals that the economy is operating below its full potential, prompting policymakers to take action and implement measures to revitalize it. Lower interest rates associated with an expansionary monetary policy can lead to a reduced demand for the Dollar, causing money to flow out of the currency due to its lower yield. For an in-depth understanding of this mechanism, you can refer to our article on how interest rates impact forex.
As illustrated in the chart below, forex markets can exhibit considerable volatility following the release of NFP data. For instance, on March 8, 2019, the expected NFP job additions were 180k, but the actual result disappointed with only 20k jobs added. Consequently, the Dollar Index (DXY) experienced a depreciation in value, accompanied by heightened volatility.
Foreign exchange traders must exercise vigilance when confronted with data releases such as the Non-Farm Payrolls (NFP). Traders could face the risk of being stopped-out due to the abrupt surge in market volatility. When volatility escalates, spreads also widen, and heightened spreads can precipitate margin calls.
WHICH CURRENCY PAIRS ARE MOST AFFECTED BY NFP?
The NFP data serves as a pivotal gauge of American employment, consequently exerting a profound impact on currency pairs featuring the US Dollar (such as EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, among others). Nevertheless, traders must exercise vigilance since other currency pairs also experience heightened volatility during the NFP release, potentially leading to unwanted stop-outs. This phenomenon is exemplified in the chart below, depicting CAD/JPY during the NFP data release. Notably, the surge in volatility may unexpectedly trigger stop-outs for traders, despite not being involved in trading a US Dollar-linked currency pair.
NON-FARM PAYROLL RELEASE DATES
The Bureau of Labor statistics typically unveils the Non-Farm Payrolls (NFP) data on the first Friday of each month at 8:30 AM ET. These crucial release dates can be readily found on the Bureau of Labor Statistic's official website.
Given the unpredictable and volatile nature of the NFP release, it is highly recommended to employ a pull-back strategy rather than a breakout strategy. With the pullback strategy, traders exercise patience, waiting for the currency pair to retrace before initiating any trade.
To illustrate this approach, let's consider the scenario where the NFP results fell short of expectations (20k vs. 180k expected), leading us to anticipate a depreciation in the US Dollar. Specifically, we will use the EUR/USD currency pair as our reference. As the NFP data disappointed, our forecast suggests that the EUR/USD will likely appreciate in response to the underwhelming employment figures.
TRADING THE NFP DATA RELEASES: USEFUL ADVICE & FURTHER LEARNING
Here are some useful advice to keep in mind when using NFP data releases to guide your forex trading:
- NFP data is released on the first Friday of every month.
- The NFP data release comes with increased volatility and wider spreads.
- Currency pairs that do not involve the US Dollar may also experience increased volatility and wider spreads.
- Trading the NFP data release can be risky due to the increase in volatility and possible widening of spreads. To avoid this, and to prevent getting stopped-out, we recommend using the appropriate leverage, or no leverage at all.
- Other important data releases to watch:
Besides the NFP, data like CPI (inflation), Fed funds rates, and GDP growth are also important data releases.
If you want to learn more about trading the news and data releases, see our trading the news beginner guide. We also suggest reading our traits of successful traders guide to avoid the number one mistake traders make when trading forex.
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