Nonfarm payroll data, NFP for short, is a key economic indicator that measures the change in the number of employed individuals in the United States, excluding certain types of workers such as farm workers, private household employees, and nonprofit workers. The release of this data by the US Department of Labor’s Bureau of Labor Statistics each month can have a significant impact on financial markets, including the foreign exchange (FX) market.
The FX market can be influenced by the nonfarm payroll data because it provides insight into the health of the US economy. If the data indicates that the US labor market is improving, this can increase investor confidence in the US dollar, causing it to appreciate against other currencies. Conversely, if the data suggests a weaker labor market, this can cause investor confidence in the US dollar to decrease, causing it to depreciate against other currencies.
In addition to the effect on the FX market, the nonfarm payroll data also plays a critical role in the decision-making process of the Federal Reserve (Fed). The Fed closely monitors this data to assess the overall health of the US economy and to determine whether to adjust interest rates or implement other monetary policy measures. If the nonfarm payroll data shows strong job growth, the Fed may consider raising interest rates to keep inflation in check. On the other hand, if the data shows weak job growth or job losses, the Fed may take a more accommodative stance and consider lowering interest rates to stimulate economic growth.
In summary, the nonfarm payroll data is a crucial economic indicator that can significantly impact financial markets, including the FX market. It is also a key factor that the Fed considers in its decision-making process regarding monetary policy. Investors and traders closely monitor this data release to inform their trading strategies, and its impact on the FX market can be felt in the short-term and longer-term currency exchange rates.
How NFPs Affect Market? Examples for EURUSD
This chart shows how EURUSD moved in the last two data releases for the next six hours following the announcement. The white dashed line shows the average of the one-year period, while the green and red dashed lines represent plus and minus 2 standard deviations from the average. The orange and yellow lines are the EURUSD’s movements for the last two data releases.
The last data release, in February, was a big surprise for the markets. The nonfarm payrolls change was expected to fall from 223k to 189k, but it was announced as 517k, 8.34 standard deviations above the survey median. After the release, EURUSD fell hard in the first 20 minutes, then had a small upside reaction for some time, and then continued falling. After the 6-hour period, EURUSD was down 1.10%.
The second data release, the yellow one, is from the January release. NFP was expected to fall from 263k to 205k, but it was announced as 223k, 0.48 standard deviation above the survey median. Despite the strong data, the dollar index lost value, and EURUSD jumped. Just like the February data, EURUSD had a small correction after the initial move, then continued its upward movement and finished the 6-hour period moving up 1.42%. But why did EURUSD gain value despite good NFP data that came above the market survey?
Along with the NFP, there are other factors that affect the markets, such as other key data announced at the same time, market pricing before the data is released, and FED expectations. For example, at the January announcement, the fall of average hourly earnings from 5.1% to 4.6% was in the spotlight because of the wage-inflation and FED rate correlation. Plus, the payroll change was just above the survey but still below the earlier data. On the February release, however, average earnings were above expectations, NFP was way over the survey, unemployment fell, and labor participation jumped.
Other than the data, market positioning is also important. Before the February release, the market was in favor of Euro against the Dollar because of falling inflation and Powell’s dovish “disinflation” speeches. Long position coverage possibly intensified the downside move for EURUSD.
How to Trade?
Most of the time, after the NFP data is released, there will be a fast initial move. Most inexperienced traders try to catch the market, but these moves usually happen almost instantly, and even stop-limit orders can’t catch them due to slippage. After the fast initial move, EURUSD continues to fall for some time, as was the case in the example above for 20 minutes. Then, a correction usually starts, possibly eliminating inexperienced traders with big positions relative to their account balance. After the corrective phase, the main move usually initiates.
Another example for NFP, at the January announcement, the initial move was more undecided because most of the data were positive, but some are negative. The first move was smaller than the main move relative to the February release. The correction was also bigger relative to the initial move. After the correction, EURUSD was able to hold above the level before the data and then started the main move to the upside.
Usually, the main move is in the same direction as the initial move, but this is not always the case. At the December release, the NFP came above the survey and the previous data. Earnings were over the survey, unemployment was unchanged, but participation fell while expected to rise. The initial move was to the south. After that, as expected, a correction happened. Then, when you would expect the main move to the downside, it fell short and couldn’t pass the initial dip. It was a trap for short positions. Then, with two breakouts, EURUSD moved past the last level before the data within 12 hours.
Conclusion
The nonfarm payrolls data can trigger a lot of volatility in the markets. Traders should prepare a set of rules for themselves to limit losses in this high-volatility and high-risk environment.
• Positions should be smaller than normal to survive without much damage if things do not go as expected. Due to high volatility, close stops can be a hindrance. Therefore, small positions will be essential to limit risk.
• The initial move will be too fast to catch, so other opportunities such as corrections or breakouts may provide better trade entry points.
• In addition to the NFP, other data is also important. The unemployment rate and participation rate show the long-term direction for the job market, while average earnings are closely watched by the FED because they affect inflation and inflation expectations significantly.
• In addition to general rules, traders also create their own rules, such as if or when to enter a trade and the maximum amount of risk to take according to their trading style.
