How Does Non-Farm Payroll Affect Forex Trading?

Active forex traders are relentless when it comes to monitoring the various key economic indicators intertwined with the market. The reason for this is pretty clear: These indicators allow a trader to identify both minor and major trends with regard to economic growth.

Key economic indicators that many advanced forex traders opt to monitor include the Consumer Price Index (CPI), housing stats, gross domestic product (GDP), personal consumption expenditures (PCEs), and the employment report.

The Reason NFP Data Is Important
The employment report, which is released by the Bureau of Labor Statistics, contains information related to unemployment, job growth, and payroll data, among other key statistics. Data-wise, the most important stat that traders should take note of is the nonfarm payroll (NFP) figure.

This represents the total number of paid U.S. workers of any registered business; exclusions to this figure include private household employees, employees of nonprofit organizations, general government employees, and—as you can probably already gather—farm employees.

The data is then placed alongside the unemployment rate, which is based on a household survey of employment. A trader can then draw an immediate correlation between the two, with the overall employment rate becoming apparent to a certain extent.

Although it may be debated in some circles (with some even labeling nonfarm payroll forex trading as a lagging indicator), the reason nonfarm payroll numbers have an effect on forex trading is that the job data interlinks with the ups and downs of the economy. When jobs are increasing in number, sentiment within the market generates momentum, with consumers having more disposable income and, thus, spending more.

By contrast, the January 2020 NFP data deepened pessimism regarding the strength of the U.S. economy. The USD/EUR chart below illustrates the U.S. dollar’s quick decline in value along with a longer, more gradual decline in the days after the report was released:

An increase in user spending has always been a factor behind USD performance, even if its impact is often understated. For this reason, job gains can definitely affect nonfarm payroll forex trading.

More recently, the March 2022 NFP report triggered a gradual decline in EUR/USD’s value. Fears of interest rate hikes fueled by lowering employment rates stoked concerns that monetary policy would be focused on controlling inflation and stabilizing the U.S. economy:

The NFP Domino Effect
Nonfarm payroll data and related statistics can also cause a domino effect, which, in turn, will further affect forex trading and market performance. When job gains accelerate rapidly, the Federal Reserve can relate this data to interest rate changes, potentially pushing through an increase or decrease depending on the circumstances.

As most already know, the Federal Reserve has a dual mandate when controlling monetary policy, which can mean that nonfarm payroll data can directly influence the biggest impact maker with regard to forex trading.

Forex traders face indicator after indicator when it comes to investing effectively; it’s sometimes an information overload. Personal spending and retail sales, along with the CPI and PCEs, have the power to alter the course of the capital markets.

Why All Forex Traders Should Pay Attention to Nonfarm Payroll Data
With so many sources of economic news and other indicators to follow, less experienced traders may wonder why NFP data is such an important resource to track.

In reality, there are many reasons why nonfarm payroll reports are important to account for in your trading strategy, regardless of how you incorporate this information into your trades. These reasons include:

NFP data reflects sentiment, inflation, and growth potential all through a simple-to-read report. Few sources of data account for all of these data points and considerations and with accuracy that you can trust in your forex trades.

What to Look for in the Employment Report
Fortunately for forex traders, the employment report is fairly simple in terms of the data it offers and its possible implications on the strength of U.S. currency. In general, you want to pay attention to payroll figures and how many jobs are being added each month, but you’ll also need to balance these figures against the estimates leading into the report, which can place those payroll numbers into context and help you gauge the health of the economy relative to a wide range of moving variables.

In general, forex traders want to see payroll numbers grow by at least 100,000 in a given month. This is a sign of continued growth in the economy, and it can fuel bullish sentiments regarding the U.S. dollar. But you also need to consider these numbers within the context of the estimates going into the report. If the payroll increase amounts to 150,000 in a given month and estimates were only 100,000, this is a strong number. The payroll increase not only hit the ideal benchmark but also outperformed expectations.

Other Economic Reports to Follow
Even if NFP becomes your most trusted and emphasized U.S. economic report, other reports are worth monitoring and considering in your trading strategy—including for use alongside the nonfarm payroll report.

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