How Does Non-Farm Payroll Affect Forex Trading

On the first Friday of every month, the financial markets await the announcement of the Non-farm Payroll (NFP) data by the . The announcement of this forex news is often made at 12.30 GMT. The release of the NFP data is one of the biggest fundamental pieces of information based on which the traders and investors make their buy and sell decisions.

Non-farm Payroll (NFP) – What Is It

The NFP report provides information on employment change (the number of jobs added or lost). It indicates the change in the number of people employed in the goods-producing, manufacturing and construction companies in the U.S. in the prior month. It includes the government jobs, but not the farming sector. It is an important macroeconomic data and it has a strong impact on the forex market. This report also provides a peek into the state of America’s economy.

The ADP Non-Farm Payroll Change report is generally released one or two days prior to the release of the NFP report. It does not have a significant impact on the forex market, but it helps traders to get ready for the big moment, the release of the NFP data.

Relevance of the NFP Data

This forex news provides an idea about the relative strength of the labor market in the U.S. The NFP report assumes a lot of importance because of two reasons:

  • – The United States of America is the world’s largest economy.
  • – The reserve currency of the world is the U.S. dollar.

Many economies around the world peg or tie the value of their currency to the value to this reserve currency. Further, commodities such as oil and gold are priced on the basis of the U.S. dollar. In addition, the debt of America is priced in terms of the U.S. dollar.

The NFP data is also important as far as forex traders are concerned. This is because it enables them to take advantage of the market movement and accrue some profits. The often moves the financial markets because of its close relationship with the reserve currency. In addition to moving the currency, equity, and commodity markets, the NFP data impacts interest rate decisions and treasuries. The impact can be felt as soon as the macroeconomic data is released. At times, the impact can be very dramatic.

The NFP and the U.S. Dollar

Employment is an important factor as it reflects the economic situation of the U.S. When there is an increase in the number of people that are employed in the U.S., it means that the economy and the industries are doing well. This also means that the U.S. economy will expand. 

This encourages people in the U.S., and other countries as well, to invest in the country and make a profit. This means they will buy the U.S. dollar. As the demand for the currency goes up, the value of the dollar will also go up. The reverse happens when the number of employed people in the U.S. goes down. Traders will sell off their U.S. dollar holdings. As the demand comes down, the currency’s price will also decline.

This is to say that a stronger-than-expected NFP report indicates the strength of the U.S. labor market and, therefore, the price of the dollar rises. Conversely, a weaker-than-expected NFP report shows that the U.S. labor market is weak and this, in turn, pushes the price of the dollar down.

Before the Release of the NFP Data

The hours preceding the announcement of the NFP data can be decisive. If the level of uncertainty is high, forex markets will experience a great deal of volatility. This is because of the anxiety experienced by the traders and investors ahead of the announcement. Typically, the volatility experienced at this stage does present investors with trading opportunities.

After the Release of the NFP Data

Though the forex market experiences big price movements in major currencies during the minutes following the release of the NFP data, volatility often continues for many hours. As such, post release time presents investors with better trading opportunities.

Summarizing, the NFP report is one of the forex news that is most watched. This is because employment has the potential to drive every aspect of America’s economy. The forex market reacts irrespective of whether the NFP report comes in better or worse than the expectation of the analysts. Many a time the forex market overreacts and then settles down close to the starting point.

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