NFP & FOREX Trading

The non-farm payroll (NFP) figure is a key economic indicator for the United States economy. It represents the number of jobs added, excluding farm employees, government employees, private household employees and employees of nonprofit organizations.

US Non Farm Payroll historical results

NFP releases generally cause large movements in the forex market. The NFP data is normally released on the first Friday of every month at 8:30 AM ET. 

HOW DOES THE NFP AFFECT FOREX?

NFP data is important because it is released monthly, making it a very good indicator of the current state of the economy. 

Employment is a very important indicator to the Federal Reserve Bank. When unemployment is high, policy makers tend to have an expansionary monetary policy (stimulatory, with low interest rates). The goal of an expansionary monetary policy is to increase economic output and increase employment.

So, if the unemployment rate is higher than usual, the economy is thought to be running below its potential and policy makers will try to stimulate it. A stimulatory monetary policy entails lower interest rates and reduces demand for the Dollar (money flows out of a low yielding currency). 

NFP forex reaction

Forex traders must be wary of data releases like the NFP. Traders could get stopped-out due to the sudden increase in volatility. When volatility increases, spreads do too, and increased spreads can lead to margin calls.

WHICH CURRENCY PAIRS ARE MOST AFFECTED BY NFP

The NFP data is an indicator of American employment, so your currency pairs that include the US Dollar (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and others) are most affected by the data release.

Other currency pairs also display an increase in volatility when the NFP releases, and traders must be aware of this as well, because they may get stopped out. The chart below shows the CAD/JPY during the NFP data release. As you can see, the increase in volatility could stop a trader out of their position even though they are not trading a currency pair linked to the US Dollar.

Here are a few tips to remember when using NFP data releases to inform your forex trading:

NFP data is released on the first Friday of every month.

The NFP data release is accompanied with increased volatility and widening spreads.

Currency pairs not related to the US Dollar could also see increased volatility and widening spreads.

Trading the NFP data release can be dangerous due to the increase in volatility and possible widening of spreads. To combat this, and to avoid getting stopped-out, using the appropriate leverage, or no leverage at all is recommend. 

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