The employment figure is a key element in the fundamental analysis of the economy. Each publication of jobs in non-farm payrolls (NFP) usually has a big impact on the currency trade.
The analysis of exchange rates before and after the publication of this key indicator of employment shows that NFP is one of the most important factors that cause short-term changes in the market and that is why it is given high priority in the analysis of the Forex market.
The number of jobs in the non-farmpayrolls is usually published by the Bureau of Labor Statistics on the first Friday after the reference month at 8:30 EST.
What is NFP?
NFP is the number of jobs in the non-farm sector, which does not include the following sectors:
- Farm
- State
- Private
- Non-profit
This covers 80% of the employed population of the United States and is used by the Federal Reserve and other government agencies to determine the state of the economy at present and in the future. On the basis of NFP senior officials formulate domestic and international monetary policy.
Why NFP is important
NFP reflects job creation in the US economy, and it is a very important indicator of consumer spending, defining the general state of the US economy. The more jobs created, the higher the level of consumer spending and the stronger economy. Therefore, NFP generally is preferred against other economic indicators.
The growth of the US economy generally has a positive effect on the exchange rate of the US dollar against other currencies. A stronger US economy may favorably influence the economies of other countries, which could have an impact on boosting US interest rates.
Rising interest rates in US make possession of dollars more profitable in the world market, which ultimately strengthen the US dollar against other currencies.
How NFP affects currency trading
When using NFP in fundamental analysis, the consequences of publication usually depends on the difference between the actual value and the consensus forecast of analysts of the Forex market. If the actual value is higher than expected, it is beneficial to the US dollar.
Conversely, if the number of jobs in non-farm payrolls is lower than expected, the dollar will be under pressure as the low value indicates a recession in the US labor market. Data are published at the beginning of the month and reflect the situation for the previous month, so the NFP is a leading indicator.
Publication of NFP usually creates significant volatility in the Forex market, especially if the actual value is significantly closeto the forecast. Changes in national employment by ADP is another indicator of employment, published on Wednesday, after the NFP, and many analysts studying the Forex market evaluate it as the preliminary data before the publication of NFP.
Since before and after the publication of NFP there is often observed volatility in the Forex market, to trade at this time is only recommended for experienced traders who know very well the dynamics of unstable trading conditions and are able to respond quickly to new data. Inexperienced currency traders are advised to close their positions before the publication of NFP, wait until the markets calm down after the publication, and then re-open the positions.