Active forex traders are relentless when it comes to monitoring the various key economic indicators intertwined with the market. The reason for this is pretty clear, because these indicators allow a trader to identify both minor and major trends with regard to economic growth.
Key economic indicators that many advanced forex traders opt to monitor include the Consumer Price Index (CPI), housing stats, gross domestic product (GDP), personal consumption expenditures (PCEs), and the employment report.
Across these indicators, the employment report arguably carries the most weight, because within it is a wealth of statistics that allow traders to read between the lines when it comes to understanding the current state of the economy.
The Reason NFP Data Is Important
Released by the Bureau of Labor Statistics, the employment report contains information related to unemployment, job growth, and payroll data, among other key statistics. Data-wise, the most important stat that traders should take note of is the non-farm payroll (NFP) figure.What this represents is the total number of paid U.S. workers of any registered business, with exclusions to this figure including private household employees, employees of nonprofit organizations, general government employees, and—as you can probably already gather—farm employees. The reason traders choose to both acknowledge and scrutinize this data is because it provides a footing for identifying potential rates of inflation, along with the rate of economic growth.
When this report hits trading newswires on the first Friday of every month, market activity has a tendency to rise, with non-farm payroll data often having an impact on forex trading as a whole. What immediately jumps out is the fact that the data is timely, with the report’s calculations coming about through the monitoring of the employment practices of some of the largest corporations in the United States.
The data is then placed alongside the unemployment rate, which is based on a household survey of employment. A trader can then draw an immediate correlation between the two, with the overall employment rate becoming apparent to a certain extent.
Although it may be debated in some circles (with some even labeling non-farm payroll forex trading as a lagging indicator), the reason non-farm payroll numbers have an effect on forex trading is that the job data interlinks with the ups and downs of the economy. When jobs are increasing in number, sentiment within the market generates momentum, with consumers having more disposable income and, thus, spending more.
A great example of this bears out in the USD/EUR chart following the July 2019 employment report, which far exceeded estimates and signaled continued economic strength in the United States, which bolstered prices for the currency pair:
For more information on how the report was expected to affect the strength of the U.S. dollar, check out our video previewing the report and its possible implications:
By contrast, the January 2020 NFP data deepened pessimism regarding the strength of the U.S. economy. The USD/EUR chart below illustrates the U.S. dollar’s quick decline in value, along with a longer, more gradual decline in the days after the report was released:
An increase in user spending has always been a factor behind USD performance, even if its impact is often understated. For this reason, job gains can definitely affect non-farm payroll forex trading.
The NFP Domino Effect
Non-farm payroll data and related statistics can also cause a domino effect, which, in turn, will further affect forex trading and market performance. When job gains accelerate rapidly, the Federal Reserve can relate this data to interest rate changes, potentially pushing through an increase or decrease dependent on the circumstances.As most already know, the Federal Reserve has a dual mandate when controlling monetary policy, which can mean that non-farm payroll data can directly influence the biggest impact maker with regard to forex trading.
Forex traders face indicator after indicator when it comes to investing effectively, with it sometimes being an information overload. Personal spending and retail sales, along with the CPI and PCEs, have the power to alter the course of the capital markets.
That being said, the significance of non-farm payroll data and how it affects forex trading can’t be ignored, because it is arguably the most notable economic indicator that there is; it reflects sentiment, inflation, and potential growth all through unbiased data. If you trade forex, you owe it to yourself to adapt to non-farm payroll data as it becomes available.
What to Look for in the Employment Report
Fortunately for forex traders, the employment report is fairly simple in terms of the data it offers and its possible implications on the strength of U.S. currency. In general, you want to pay attention to payroll figures and how many jobs are being added each month—but you’ll also need to balance these figures against the estimates leading into the report, which can place those payroll numbers into context and help you gauge the health of the economy relative to a wide range of moving variables.In general, forex traders want to see payroll numbers grow by at least 100,000 in a given month. This is a sign of continued growth in the economy, and it can fuel bullish sentiments regarding the U.S. dollar. But you also need to consider these numbers within the context of the estimates going into the report. If the payroll increase amounts to 150,000 in a given month and estimates were at only 100,000, this is a strong number: The payroll increase not only hit the ideal benchmark, but it also outperformed expectations.
On the other hand, if the estimate was 200,000 and the actual payroll increase is only 150,000, this can have an adverse effect on how forex traders feel about the U.S. dollar, because it indicates economic struggles that weren’t necessarily anticipated. Even though the payroll increase hit that target threshold, the lower-than-expected results can spark worry that unforeseen challenges are hitting the U.S. economy, which could trigger a USD sell-off.