A nonfarm payroll (NFP) is a key economic indicator that is closely watched and examined by analysts and investors around the world to predict the future level of economic activity. The NFP report exhibits the total number of paid employees in the United States of America. The NFP accounts for almost 80% of the country’s Gross Domestic Product (GDP) workforce and excludes those who work on farms, private households, government employees, and non-profit workers. The U.S Bureau of Labor Statistics releases a report on nonfarm payrolls on the first Friday of every month.
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The nonfarm payroll release is considered to be one of the key indicators that give insight into the economy of the United States. The report also estimates all NFP employees' average weekly earnings. It is said that the country’s economy is growing when NFPs are expanding, and the economy is declining when NFPs are shrinking. A larger unexpected NFP increase leads to inflation.
The financial markets react to the NFP fluctuations, particularly the Forex markets where traders will sell U.S Dollars when the NFP number is below their estimates, and they see U.S Dollar weakening.
In the Forex market, the NFP report results in significant price movements, which is more than any other news release. The investors, traders, funds, and speculators all forecast the NFP number and the direction the market will move in. With so much anticipation, even when the actual number is close to the expected number, then also market sees late rate swings. The traders mostly use 5 or 15-minute chart intervals when analyzing the NFP report.
How to Analyze NFP Number
A good thing about the NFP report is that it is released every month that gives an accurate picture of the U.S economy. The report released by the U.S Bureau of Labor Statistics can easily be viewed by traders on the economic calendar. But before the report is released, a survey is done among traders and analysts about their expectations, and an expected number is formed. Once the NFP report is released, the actual NFP number is compared with the predicted NFP number. The NFP number is analyzed in three ways, which are1. A high NFP number is better for the U.S economy as it means more workers will participate in economic growth. Consumers will have both money and job that will increase consumer spending. The overall market growth leads to an increase in the price of the U.S Dollar
2. A lower NFP number is not suitable for the U.S economy as it means lower employment and a decline of jobs, which means that economy is not growing. The Forex traders will favour other currencies that are stronger as compared to U.S Dollar.
3. An NFP number that matches the expectation will lead to mix reaction in the Forex markets. The traders will look for some other underlying factor, such as the unemployment rate. If the unemployment rate drops, the economy will go up, and traders would pick a stronger Dollar to trade with. But if the unemployment rate increases, the economy would suffer, and traders would select other currencies instead of Dollar.
Many traders tend to use trading news releases, which can be profitable but also risky as the traders are speculating the direction of a certain currency pair upon the announcement. However, some traders wait for the swings to subside and then speculate a direction to capitalize on the price movement.
The NFP Trading Strategy
Forex traders eagerly await the NFP report as it tends to impact the trading between all the major currency pairs, but the one which is the most anticipated is the GBP/USD pair. The other currency pairs affected by the NFP report are EUR/USD, AUD/USD, USD/JPY, and USD/CHF). The Forex market is always open 24/Hours, which gives a chance to traders so they can trade the news event.
Most of the Forex traders normally use a pull-back strategy as compared to a breakout strategy. The theory behind this strategy is to allow the news or information to settle in the market, or other words, wait for the currency pair to retrace and then enter a trade. After the initial swings have occurred and many participants of the market, after spending time to analyze the NFP number, will enter the trade in the direction of the trend or momentum. Forex traders must be wary of NFP numbers as they can be stopped-out when there is an unexpected increase in volatility, resulting in margin calls.
Strategies for NFP Trading
The Forex traders usually form their strategy using 5 or 15-minute chart intervals when analyzing the NFP report. Some of the strategies that traders must consider are
- The NFP report is released on Friday of every month at 8:30 A.M E.T. but for 15-minute till 8:45 A.M nothing will be done
- The bar representing the time frame from 8:30 to 8:45 will be quite wide-ranging, and traders wait for an inside bar to occur after this first bar.
- The high point and low point of the inside bar are the signals, and when the following bar closes above or below the inside bar, the traders trade in the direction of the break-out.
- The NFP report increases the volatility of the market, which widens the spreads too, and as a result, trading can be risky, but to avoid reaching stopp–out; the traders can use leverage option or no leverage
- The traders usually make a maximum of two trades, and if they get stopped-out on both, they do not enter the trade again.
- The best period is considered to be four hours after the NFP report is released, and most traders make an exit 4 hours after their entry.
The traders must also consider factors and data from other reports, such as GDP and CPI (Consumer Price Index). NFP trading provides the opportunity to profit, but the release of the NFP report increases volatility. The good strategy can be to wait out after the market's initial volatility subsides and then choose the direction the market will move in. The traders must control the risk with a stop, which will increase the potential of getting significant profit when a huge movement occurring after the BFP report is released.
The Key Elements and Effects of NFP Report
The main highlight of the NFP report is how many jobs on average have been added to the U.S economy each month. There are key elements of the NFP report, from the unemployment rate, average working hours, average hourly earnings, and hiring or letting go of employees. The U.S. Federal Reserve analyzes both employment and inflation before deciding on the interest rates.
The inflation rate is always set mostly around or below 2%, but it is quite complicated considering the unemployment rate and the number of new jobs created. If the unemployment rate is lower, and there is an increase in new jobs, then the Fed may increase the interest rates as the economy is rising. The high-interest rates will attract traders, and all the currency pairs, including USD, will see bullish trends.
The Federal Open Market Committee, or more commonly referred to as FOMC, develops the monetary policy and adjust the interest rates according to changes in the economy. There are two mandate or criteria that the FOMC must fulfill, which includes inflation and employment, which is why FOMC keeps a close watch on the NFP report and how it changes over time.
The FOMC focuses on the rate of employed individuals with respect to population and workforce and average hourly earnings. The emphasis is on stable employment rise, a decrease in the unemployment rate, and rising wages but not too steeply.
For example, if the wages rise suddenly, then the market may not sustain the over acceleration, leading to high-interest rates. When interest rates rise, it is difficult to grow and expand the business, and new jobs are not created.
When the wages fall, it’s a sign of ensuing recession as there are plenty of employees for a business to choose from. An organization might pay less to a person as there is always an individual willing to work at the same salary. However, lower interest rates can help the ease of doing business and help the economy to grow.
The NFP report directly affects the U.S. Dollar, which is a key indicator of inflation and affects interest rates. If the NFP report is positive and trending positively, then the U.S. Dollar is set to show Bullish trends.
The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.
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