What are nonfarm payrolls? Why is NFP important? – Analysis and Forecast – June 1, 2024

A quick summary: Nonfarm payrolls figures released by the U.S. Department of Labor show the number of new jobs created across all nonfarm businesses in the U.S. last month.

Payroll figures can change significantly from month to month because they are highly correlated with the U.S. central bank’s economic policy decisions. Published numbers are closely watched by traders and tend to trigger changes in their opinions. volatility In the market. Generally, higher numbers are considered positive for the U.S. economy, while lower numbers are considered negative.

Whether you are a basic trader or one who relies primarily on technology, NFP reports regularly generate large price movements in the market that can impact your trading performance. In some cases, reports can send shockwaves through the market if actual numbers differ significantly from market expectations.

Understanding the NFP report and its details can have a huge impact on your bottom line. In this article, we’ll explain what NFP means, why it’s important, and how to trade it.

Why is NFP important?

The Non-Farm Payroll (NFP) report is a key economic report for the FX market. The headline numbers represent the number of jobs added during the month, excluding farm jobs, government jobs, NGO workers and private domestic staff.

Therefore, NFP reports often show the strength of the U.S. labor market during a given month, causing tremendous volatility in currency markets. The Federal Reserve will closely review the report to determine future adjustments to monetary policy. A better-than-expected NFP report could be a sign that the economy is overheating and that the Federal Reserve may need to tighten monetary policy. That means raising interest rates can cool the economy.

Conversely, a lower-than-expected NFP number is a sign that the U.S. labor market is struggling and the Federal Reserve may cut interest rates to support the economy. In addition to the headline number – the number of new jobs added to the U.S. economy – the report also includes two other important figures: average hourly earnings and the unemployment rate.

Many market participants, traders, investors and financial institutions around the world follow reports and make trading decisions based on their results. Understanding the NFP report can help Forex traders take advantage of large price movements caused by the report. Reports can be traded successfully using simple technical tools on short term time frames such as 5 or 15 minutes.

When will NFP be released?

The NFP numbers represent part of the U.S. Monthly Employment Report, which the Bureau of Labor Statistics releases on the first Friday of each month at 8:30 a.m. Eastern Time (13:30 p.m. London Time). The only exception is when the first Friday is a major U.S. holiday, such as New Year’s Day, when the report is postponed to the following Friday.

NFP Data: Headline Numbers and Details

The U.S. Labor Market Report includes three main categories: number of nonfarm workers, average hourly earnings, and unemployment rate. The NFP number is considered the most important release and the headline number for monthly reports, and many traders only focus on the NFP number.

The Average Hourly Earnings report shows you how much your hourly earnings have changed over the past month, expressed as a percentage. When average hourly earnings exceed market expectations, it is usually a sign that inflationary pressures may be rising and the Federal Reserve may respond by raising interest rates to support the U.S. dollar. Likewise, if average hourly earnings fall below expectations, it is a sign that the Federal Reserve may adopt loose monetary policy, which could push the U.S. dollar lower.

The unemployment rate indicates the proportion of unemployed people among all employed people in the previous month. As with other reports, a falling unemployment rate (better than expected) could support the greenback, while a rising unemployment rate (better than expected) could push the greenback lower as the Federal Reserve’s easing measures increase. Although the NFP numbers are considered the most important of these three reports, many forex traders make the mistake of completely ignoring average hourly earnings and unemployment rates when trading the US labor market report.

If the NFP number beats market expectations but the details in the report (hourly earnings and unemployment) are weak, the greenback may initially surge as algos try to capitalize on the headline number, but then there could be a complete reversal to previous numbers. Trading levels will appear in the next few minutes. That is why you should always pay attention to the entire report and read all the details before trading based on NFP.

Which pairs are most affected?

The pairs most affected by the NFP report are those that contain the US dollar as their base or counterpart currency. These include EUR/USD, GBP/USD, USD/CAD, USD/JPY, etc.

Before placing a trade, measure the average volatility of the pair you are trading over previous NFP releases and adjust your stop loss and profit targets accordingly. For example, it makes no sense to use the same stop loss size for USD/CAD and GBP/USD because GBP/USD is quite volatile.

The NFP report is a widely known report and therefore does not only impact the US dollar. Other currencies often see increased volatility soon after the NFP report is released.

Other important labor reports

In addition to non-farm salaries, traders and investors also follow other job-related indicators that can increase market volatility. The Federal Reserve is closely watching the labor market as it changes interest rates, so any jobs-related report could have an impact on the U.S. dollar.

The ADP payroll report is released the same week as the NFP report, but on Wednesday, two days before the NFP. This report reveals important information about the health of the U.S. labor market prior to the release of the widely accepted NFP.

However, keep in mind that these reports are not correlated. It is not uncommon for ADP to exceed market expectations but NFP to be lower than expected and vice versa. Automatic Data Processor Inc. (ADP) is a company that processes payroll data for approximately 20% of U.S. civilian employment, providing the company with insight into the state and trends of the U.S. labor market.

final words

The Nonfarm payrolls report (NFP) is a key economic indicator that reveals important information about the health of the U.S. labor market. The report is widely followed by all types of market participants, including retail traders, investors, hedge funds, and even the Federal Reserve, which adjusts its monetary policy based on NFP trends. This report is published by the Bureau of Labor Statistics on the first Friday of each month at 8:30 a.m. ET.

The headline number represents the number of jobs added to the U.S. economy in the previous month, excluding farm workers, personal household workers and government jobs. To get the most out of the report, traders should also follow its details, including average hourly earnings and monthly unemployment rate.

If you decide to trade an actual press release, always use a stop loss and be prepared for large price movements immediately after the release. Volatility can often lead to slippage and higher spreads, which are some drawbacks to watch out for.