Employment numbers make up a key element in the fundamental analysis of an economy. The U.S. Non-Farm Payrolls number, or NFP as it generally abbreviated, tends to have considerable impact on forex trading whenever it is released.
A review of exchange rates before and after the release of this key employment number show that the NFP data is among the most influential short-term market triggers, justifying its key priority in forex analysis.
The Non-Farm Payrolls data is generally released by the U.S. Bureau of Labor Statistics on the first Friday of the month after the data is compiled at 8:30 am EST.
What are Non-Farm Payrolls?
The NFP number represents all payroll accounts for U.S. workers from any business with the exception of:
• Farm and agricultural employees
• Government employees
• People employed in private households
• Non-profit employees involved in the care of others
The number covers as much as 80 percent of U.S. employees, and it is used by the Federal Reserve and other government agencies to determine the current and future state of the economy. Policymakers use the labor market information that the NFP data provides in formulating domestic and international monetary policy.
Why the NFP Number is Important
The Non-farm Payrolls number reflects the creation of jobs in the U.S. economy, which is a very important indicator for consumer spending that is generally the driving force for U.S. economic activity. The more jobs created, the higher the level of consumer spending, and as a result, the stronger the economy. This makes the NFP data a key leading economic indicator.
A healthier U.S. economy will generally positively impact the U.S. Dollar’s exchange rate versus other currencies. A stronger economy in the United States can also favorably affect the economies of certain other nations, and it can put upward pressure on U.S. interest rates.
Rising interest rates in the United States make holding dollars more advantageous in the global marketplace, and this will ultimately strengthen the U.S. Dollar against other currencies.
How NFP Impacts Forex Trading
When applying fundamental analysis techniques to trading the NFP number, the magnitude of the impact of the data generally depends on the difference between the actual number observed and the expected number forecast by a consensus of forex market analysts. If the actual number is higher than the expected, then this would be seen as favorable for the U.S. Dollar.
Conversely, if the Non-farm Payrolls number comes out lower than expectations, this would put pressure on the Dollar because it indicates a slowdown in the labor sector of the U.S. economy. Because the number comes out at the beginning of the month and therefore reflects data from the previous month, the indicator is a leading indicator.
The release of the NFP number generally causes considerable volatility in the forex market, especially when the actual number deviates significantly from what was expected. Another employment number, the ADP Non-Farm Employment Change is released on the Wednesday preceding the NFP number and many forex analysts look to it to give a preview of the NFP release.
Because of the volatility often observed in the forex market after the release of the NFP, trading during and after the release is best done by seasoned traders familiar with the dynamics of high-volatility trading environments and who are good at quickly reacting to new information. Forex traders with less experience might want to square their position before the number’s release and wait until markets have calmed after the release to re-establish their positions.
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