How does the NFP affect Forex trading and other markets?
What is NFP?
Nonfarm Payrolls (NFP) is the term used to refer to one of the most important indicators of the current state of the US economy. This is a report issued by the US Bureau of Labor Statistics that states how many paid workers there are in the country, excluding farm employees as well as government employees, those who work for non-profit organisations and private household employees.
It also contains other keenly-awaited information related to the economy, like unemployment rate data sorted by factors such as age, race, and gender. We can also see the average wages of employees in this report, which gives us an idea of whether spending power is growing or diminishing across the US.
This report is released at 8:30 a.m. EST, which is 1:30 p.m. GMT, on the first Friday of every month. The information it contains about the number of people working currently in the US makes it a crucial report for traders to follow.
Why does the NFP matter to traders and investors?
This report causes one of the biggest movements in the trading world, particularly in the forex trading market. Because of this, traders try to anticipate the information and then keep a close on the details once it has been released. They use it to confirm their predictions about long-term trends, or else to allow them to react swiftly to figures that show something unexpected.
As an overall view of the American economy, the NFP gives us some key details to consider when trading forex and other financial instruments. For instance, if the total number of people in employment has risen then this is good news as it suggests a strong, growing economy. If wages rise, then there are going to be more people with greater spending power to provide more profits for the companies that provide them with goods and services.
Investors will want to buy or back the USD currency if the figures are good. On the other hand, a poor NFP will encourage them to sell dollars and back other currencies instead. This is because they will see the signs pointing towards a slowing economy where less spending power will make it difficult for firms to earn profits.
The fact that so many people look out for the NFP release means that there is often a large price swing once the numbers are known and everyone reacts to them. This makes it the sort of market in which active traders can look to experiment with by moving wisely and with a clear strategy in mind.
How to analyse the NFP report for trading purposes
More people in paid employment means more consumers who can help to stimulate the economy by purchasing goods and services. If there have been significant gains in the payroll numbers, this is likely to help the US dollar to gain ground against other currencies. Any drop in the total suggests bad news for the American economy and could lead to a weaker dollar. The movement in the market is likely to be bigger if unexpected results are announced, regardless of whether they are higher or lower than had been expected.
Currency pairs and other instruments affected by the NFP
The most noticeable effect when the NFP is released is on the forex trading market. Any currency pair that includes the US Dollar could be affected, such as the following.
These pairs tend to have increased volatility and widening spreads following this report being made public. The effect of the NFP release can also extend to other currency pairs in terms of increased volatility, but the main impact is seen in those pairs where the USD is present.
While forex traders pay close attention to the numbers in the NFP, it's something that you may use to your advantage if you trade any type of financial instrument.
The stock market and various commodity markets also reflect the information contained in the Nonfarm Payrolls report. Since this report gives us a solid indicator of how the economy is progressing, it can be used to gauge whether levels of consumption will increase. An increase would boost demand for oil, gas, and all of the other services that drive the country in one way or another.
How different trading styles can be used with the NFP release
When this information hits the headlines around the world, it makes the markets move one way or another, which is perfect for an active trader looking to capitalise on any price swings. As we’ve seen, the forex market usually becomes more volatile, although traders can also look to invest in share or commodity trading.
A popular NFP trading style on forex involves waiting until the initial reaction has worn off and then following the direction of the market momentum. Since the volatility level may be high, you should use a 30-pip stop and look to trade out within four hours if you follow this approach.
Another approach is to see whether the NFP data confirms a long-term forex trading trend that the trader was waiting to see verified. In this case, it can be the trigger for carrying out a trade with more confidence than would have been the case before the report was issued.
The next steps to consider
The release of NFP data is a good moment to carry out forex trading, but what else do you need to know to make this a worthwhile strategy?
- A guide to forex trading strategies that explains the alternatives, such as day trading, position trading and scalping.
- An in-depth look at scalping strategies that gives you the complete rundown on how to trade forex in this way.
- A comprehensive guide to day trading with step-by-step strategies and answers to some of the most commonly asked questions.
- Details of how to carry out swing trading, with tips for beginners and a look at using a demo account to use this trading style
- A position trading guide that lets you see how to get started with this trading strategy.
- An introduction to the MetaTrader 4 platform that is particularly popular among forex traders.
Not investment advice.
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