What is the NFP?
The non-farm payroll (NFP) figure is a prominent economic indicator for the United States economy. It represents the number of jobs added, excluding farm employees, government employees, private household employees, and employees of nonprofit organizations.
How Does the NFP Affect Forex Market?
NFP data is important because it is released monthly, making it a very good indicator of the current state of the economy. The data is released by the Bureau of Labor Statistics and the next release can be found on an economic calendar.
Employment is a very important indicator for the Federal Reserve Bank. When unemployment is high, policymakers tend to have an expansionary monetary policy (stimulator, with low-interest rates). The goal of an expansionary monetary policy is to increase economic output and increase employment.
So, if the unemployment rate is higher than usual, the economy is thought to be running below its potential and policymakers will try to stimulate it. A stimulatory monetary policy entails lower interest rates and reduces demand for the Dollar (money flows out of a low-yielding currency). To learn exactly how this works, see our article on how interest rates affect forex.
Which Currency Pairs are Most Affected by NFP?
The NFP data is an indicator of American employment, so your currency pairs that include the US Dollar (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, and others) are most affected by the data release.
Other currency pairs also display an increase in volatility when the NFP is released, and traders must be aware of this as well, because they may get stopped out.
Analyzing the Non-Farm Report Numbers
Like any other piece of economic data, there are three ways to analyze the U.S. non-farm payroll number:
1. A higher payroll figure is good for the U.S. economy. This is because more job additions help to contribute to healthier and more robust economic growth. Consumers who have both money and a job tend to spend more, leading to growth. As a result, foreign exchange traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above—let’s say 200,000—will help to fuel U.S. dollar gains. An above-consensus estimate release will have the same effect.
2. An expected change in payroll figures causes a mixed reaction in the currency markets. Forex investors witnessing an expected change in the NFP report will turn to other subcomponents and items to gain some sort of direction or insight. This includes the unemployment rate and manufacturing payroll subcomponent. So, if the unemployment rate drops or manufacturing payrolls rise, currency traders will side with a stronger dollar, a positive for the U.S. economy. But, should the unemployment rate increase and manufacturing jobs decline, investors will drop the U.S. dollar for other currencies.
3. A lower payroll figure is detrimental to the U.S. economy. Like any other economic report, a lower employment picture is negative for the world’s largest economy and the greenback. Should the NFP report show a decline below 100,000 jobs (or a less-than-estimated print), it’s a good sign the U.S. economy isn’t growing. As a result, Forex traders will favor higher-yielding currencies against the U.S. dollar.
The NFP Trading Strategy
The NFP report generally affects all major currency pairs, but one of the favorites among traders is the GBP/USD. Because the forex market is open 24 hours a day, all traders have the ability to trade news events.
The logic behind the strategy is to wait for the market to digest the information’s significance. After the initial swings have occurred, and after market participants have had a bit of time to reflect on what the number means, they will enter a trade in the direction of the dominating momentum. They wait for a signal indicating the market may have chosen a direction to take rates. This avoids getting in too early and decreases the probability of being whipsawed out of the market before it has chosen a direction.
The Bottom Line
The logic behind this strategy of trading the NFP report is based on waiting for a small consolidation, the inside bar, after the initial volatility of the report has subsided and the market is choosing which direction it will go. By controlling risk with a moderate stop, we are poised to make a potentially large profit from a huge move that almost always occurs each time the NFP is released.
-Reference Taken From “DailyFX and Investopedia”