The nonfarm payrolls report and Forex have an idyllic but savage relationship of love and hate. There is no better economic release to trade in Forex, or at least more popular, than the U.S. employment report and the infamous Nonfarm payrolls number, but what if NFP?
Today, we are going to talk about one of the most popular and pip-producer economic events in the whole investment market.
What is NFP, how to trade NFP, and what the report shows every first Friday of each month? Keep reading, and we will discover how to make money with it together.
What is NFP
The Non farm payroll number is a component of the employment report of the United States. It represents the total number of employees in the country.
Also called the NFP report, it refers to any job except for farm work, private household jobs, nonprofit organizations, unincorporated self-employment, proprietors and military, and intelligence agencies.
The number is released by the Bureau of Labor Statistics every first Friday of the following month inside of the United States employment report. There are occasional exceptions when the first Friday is a bank holiday, and then, the data is released the following Friday. It is usually published at 8:30 AM, Washington D.C. time.
Every month, the Bureau of Labor Statistics releases the employment report, which includes the change in the number of Non farm payrolls regarding the last month. Usually, it is seen as the most critical data of the release, even more important than the unemployment report as it shows how many people are getting or losing their jobs.
Why the nonfarm payrolls report is important
As said before, nonfarm payrolls data shows the change in the number of jobs from the previous month. It accounts for around 80% of the total labor force involved in the production of the full gross domestic product of the country. So, it matters.
However, the employment report also shows vital data for the U.S. economy, and that has a direct impact on the Forex market, as well as equities, futures, and the whole investment market.
With the employment report, the Bureau of Labor Statistics also publishes the unemployment rate, which is a measure of people who don’t have a job but is actively looking for one. The average weekly hours, which is the number of hours worked by an employee every week as average in the given month.
The average hourly earnings, the change of income per hour received by an employee on average in the period, is also reported
Finally, the rate of participation in the labor force, which is the percentage of people in conditions to work who are working.
Please note that every single report may include number revisions for the previous months.
How the NFP affects markets
As one of the events with more impact in markets is the non-farm payroll, people look to anticipate numbers or react to the release.
There are three possible outcomes from the report, a good or better than expected number, a data in line with expectations, and a weak or lower than expected figure. It affects differently to each currency, but mostly to the dollar, as it is the money of the United States.
A higher than expected nonfarm payrolls
A good NFP is good for the economy in the United States. Think that more jobs entering the labor market will contribute to the expansion of domestic consumption, and it will support a healthier and robust economic growth.
People who have money and jobs are more confident, and then they invest and spend more money. Also, confidence is a crucial parameter of the economy. Good market sentiment will push the economy more and more.
So, any great or higher than expected NFP will usually push the dollar higher. That being said, the release can also fuel risk appetite, so, equities would rise too, containing the dollar, as people will spend more dollar on riskier assets.
A lower than expected payrolls
A weak non farm payrolls number is bad for the economy as it represents that fewer people than previously expected got a job. Also, if it is a negative number, which means a decline in jobs.
So, the country is not doing well, and it will not do as good as expected in the middle term. Also, companies will cut their budget as people will spend less and invest less.
It will also signal that the Federal Reserve may be thinking about intervening the market, which is terrible for the economy as a whole in the long term.
In this framework, a weak NFP will push the dollar down. However, be aware of risk aversion conditions, which usually favors the dollar amid its status of a safe haven.
A NFP in line of expectations
A nonfarm payroll in line of expectations is something that doesn’t surprise markets, and it can cause a mixed reaction in the Forex market. It could be that the number was fully priced in, but also it is confirming what the market expected. So, a weak number will always be bad, no matter it was expected, and a good number will be a confirmation that everything is going well.
So, the reaction will be in line with the data, bad or good, but contained.
How to trade NFP
Investors who trade the NFP usually like the GBP/USD, and the USD/JPY pairs with a five-minute or 15-minute timeframe.
The idea behind the trade is to wait for the release and then watch the three first candles. You will wait for the market digestion of the number and then, for the dominating direction.
Then, wait for signals about what direction the market has chosen, and finally, they enter into the market in the inclination of the dominant trend and momentum.
Usually, traders wait for the first 15-minute candle to be completed, and then they wait for an inside bar. The second bar highs and lows will give us potential entry points. Finally, when the third bar closes above or below the given points, investors take a trade in the direction of the breakout
Remember to place a trailing stop loss that will give you an exit in case everything goes wrong. In that case, don’t trade more than two times if you get burned in both trades. It is always better to give up than to get burned.
As a target, please reevaluate the position as a minimum after 4 hours. If you can do it before, do it — one hour or when the price is approaching a significant level. Also, keep monitoring of momentum indicators.
And finally, enjoy your pips!