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2023-07-20 17:27

What is the US Non-Farm Payrolls report or NFP in the forex economic calendar?

This article explains the US Non-Farm Employment Report or NFP in the Forex economic calendar.
What is the US Non-Farm Payrolls report or NFP in the forex economic calendar? What is the US Non-Farm Payrolls report or NFP in the forex economic calendar?

The NFP index is one of the most significant indicators of fundamental analysis in the forex market, which causes large price fluctuations in major currency pairs. This article explains the basics of NFP, its role in the US economy, and how to interpret NFP data after its release.

What is the Non-Farm Employment (NFP) Report?

The non-farm payrolls report shows the number of jobs added or lost in the US compared to the previous month. This criterion does not include farmers, employees of non-profit organizations, freelancers, domestic workers, and employees of military organizations. The NFP also provides long-term employment statistics and reports on the youth Unemployment Rate Report. This index shows which part of the economy creates jobs. The government carefully checks these numbers and takes appropriate measures to improve the employment situation in that sector.

NFP Economic Reports

The Employment Situation report is a monthly report released by the US Bureau of Labor Statistics (BLS) on the first Friday of each month. This report publishes at approximately 12:30 UTC. The NFP report is a comprehensive report prepared after examining two major sectors of the economy. These two sectors include the "Household sector" and "Corporate sector." The "household survey" shows the employment rate of individuals in different categories, and the "industry survey" provides the number of new non-farm jobs added to the economy.

"Household Sector" Review

Key components of this sector include:

  • Total unemployment rate
  • Unemployment rate by gender
  • Unemployment rate by race
  • Unemployment rate by education
  • Unemployment rate by age
  • Reason for unemployment
  • The number of people participating (for employment)

"Corporate Sector" Review

Key components of this sector include:

  • Total non-farm employment added by durable goods, non-durable goods, services, and government industries
  • Working hours by employees
  • Average hourly earnings of employees

NFP Data Analysis

The NFP economic report is an essential factor of fundamental analysis, which investment managers evaluate before making investment decisions. This data is significant when determining the economy's strength and the US dollar's value. You can analyze the data by comparing the published figures of the current month with the previous month. This comparison helps determine whether the country created more jobs for its people or lost more jobs compared to last month.

Based on the monthly statistics, we can conclude whether the economy is strengthening or deteriorating. We can also predict whether the economy will perform at the expected growth rate or whether there will be a decline in GDP. Also, one of the most significant data in the monetary policy and interest rate determination of the US Federal Reserve is the NFP data.

The impact of NFP data on the US dollar's value

When the unemployment rate is low or, in other words, the employment situation is good, foreign banks and institutions trust that economy and will be willing to invest in US dollars. When other banks invest in a country, it leads to an increase in the value of the dollar and the US economy. Forex traders and investors consider this factor a significant indicator for predicting the future value of the US dollar.

Because the US is the world's largest economy, NFP data directly impacts most asset classes, including forex, commodities, and stocks. We can see that the market is reacting to the data strongly, with a lot of volume increase. During the announcement, all the main players and institutions of the market open new positions in the market or exit from the existing positions. One can see extreme fluctuations during news releases because millions of positions are created and deleted simultaneously. The state of the labor market is directly related to consumer spending (inflation), which indicates the economy's health. When people of a nation are employed, they use their wages to buy various goods and services to meet their needs. That means that the cost to the consumer will automatically increase.

The impact of NFP data on the US dollar's value

The US Bureau of Labor Statistics (BLS) releases NFP data on the first Friday of each month. As traders, we must focus on the data released and monitor it carefully. We should also monitor the previous month's data and the forecast for the current month. Many financial websites provide a graphical representation of data history giving a clear understanding of how NFP data has changed over time.

United States Non Farm Payrolls 

The non-farm payrolls report is a vital measure because it is released monthly and is an excellent indicator of the current state of the US economy. You can keep track of these data in the "Economic Calendar" of Trendo Broker. When the unemployment rate is high, policymakers tend to have budgets that increase economic output and employment. Periodic reviews are conducted to review the NFP components, and the components may be changed if necessary. Another aspect of unemployment is the number of hours worked and hourly wages. Some may be employed but work part-time or earn less money for that work. That is why the unemployment rate and US hourly wage data are published simultaneously with the publication of the NFP employment data. Traders usually focus more on NFPs because they have higher importance. But they must not neglect the other two data because they complement the NFP and give traders a general view of the US economy's state.

The publication of NFP data is associated with increased volatility and due to the large volume and disruption of supply and demand's normal balance, the spreads become wider and more than usual, which means that to avoid stop-outs, we recommend using larger stop-loss orders without changing the ratio of risk to reward. It is possible to use no leverage during the NFP news release and enter the market with smaller positions. Therefore, capital management is necessary according to personal strategy during the release of NFP.

The impact of NFP news release on the Forex market

The Non-Farm Employment (NFP) report is a key economic indicator that measures the health of the US economy. NFP shows the number of jobs added in one month, excluding farmers and employees of non-profit organizations. Therefore, higher-than-expected figures should be considered positive for the US dollar, while lower-than-expected numbers are a negative score for the US dollar. The release of NFP generally causes large movements not only in the forex market but also in the commodity and stock markets. In this part of the article, we will explain the effect of NFP on the price chart and see how to apply NFP data in our trading strategy. Let's not forget that the unemployment rate and US hourly wage data are also published simultaneously with NFP.

The image below is from the Forex Factory website, and the red mark indicates that the new news release of the indicator will largely impact the Forex price charts.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market

The image below shows the latest NFP data collected in February. The Bureau of Labor Statistics (BLS) publishes NFP data. According to the NFP data, traders and investors worldwide are opening various positions in the market, which is the reason for the increase in volatility. The expected NFP results for March 6, 2020, were around 175K (Jobs added), and the actual data was 273K (Jobs added), which is much better than the forecasts. This statistic should probably be positive for the US economy, but we must see how the market reacts to this news.

The image below shows the previous, forecast, current value, and the date of the NFP index's latest data publication as the unemployment rate and hourly wages of the United States.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market
The image below shows the Euro to US Dollar (EURUSD) currency pair chart before the announcement.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market

We will start with EUR/USD, the most liquid currency pair, and see the impact of the NFP news release. In the chart above, EUR/USD is in a strong uptrend, indicating weakness in the US dollar. One reason for this weakness is lower NFP expectations from economists compared to previous data. Market participants predict that fewer jobs were created in February, hence they do not want to be US dollar buyers. Technically, the market is only going up without a correction, and we cannot take a position on either side at this stage. When there is a strong movement in one direction, it is better to wait for the result of the news and then enter the market based on the data.

The image below shows the Euro to US Dollar (EURUSD) currency pair chart after the announcement.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market

The NFP statistics were the same as last month, and an equal number of jobs were created this time also. These figures were more than the market expected and were optimistic data for the US dollar. The chart above shows that the price drops immediately after the NFP data announcement, and the USD strengthens instantly. Volatility extends to the downside as the NFP data came in above expectations, but could not lead to a reversal of the overall trend. The "news candle" leaves a shadow at the bottom, and the price rises again. Since the current data was no better than the previous data, some traders see it as a negative for the economy and are still selling the US dollar. Until clear reversal patterns are observed, we should not sell the market assuming the data is positive.

The image below shows the US dollar to the Japanese yen (USDJPY) currency pair chart before the announcement.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market
The image below shows the US dollar to the Japanese yen (USDJPY) currency pair chart after the news announcement.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market

The images above show the USD/JPY currency pair chart that the market is in a strong downtrend, again showing the weakness of the US dollar. Since the impact of NFP is high, strong data can lead to a reversal of the overall trend, and weak and not-so-positive data can lead to a trend continuation. To be risk averse, we should think of buying trade in the market with great caution, and combine the news result with technical analysis. However, if the NFP data is not good, entering a sell trade in this currency pair is much easier. After the news announcement, we see the bullish candle and the increase of fluctuations in the upward direction. But this NFP data was not enough to push the price to a higher peak, which means that the announced figures did not positively impact the US economy.

The image below shows the Australian dollar to the US dollar (AUDUSD) currency pair chart before the announcement.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market
The image below shows the Australian dollar to the US dollar (AUDUSD) currency pair chart after the news announcement.
  The impact of NFP news release on the Forex market The impact of NFP news release on the Forex market

In the AUD/USD currency pair, the US dollar is much stronger than other currency pairs and below the moving average before the announcement. Since the US dollar shows some strength with the news release, we can say that positive data can reduce the currency and lead to a downward movement. And only negative NFP data can lead to an upward move. After the release of the NFP data, we see the "Doji" candlestick pattern formation, indicating the lack of decision in the market. As the price remains below the moving average, we can expect the volatility to increase in the descending direction.

Summary

The NFP report is a significant economic indicator in the forex market, as it provides valuable insights into the strength of the US economy and its impact on the global economy. Understanding the NFP report is crucial in making informed trading decisions as a forex trader. Traders can use various strategies such as trend following, news forecasting, and technical analysis to trade the NFP report. However, it is important to remember that the market can be volatile and unpredictable, so traders should always use risk management strategies and set stop-loss orders to protect their positions.

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