The volatility of the foreign exchange (or Forex) market is caused by many factors. It is expressed through data such as CPI index, GDP index, Trade balance, etc. In particular, the Nonfarm Payroll index is one of the most important and strongly influenced by Forex. So what is Nonfarm Payroll? Why is it so influential? Read this article to find out the answer!
What is Nonfarm Payroll?
Before going to the analysis, let's find out what the Nonfarm Payroll is. Nonfarm Payroll (abbreviated NFP) is an important economic index related to employment in the United States. It does not include people who work for farms, the federal government, private households, and nonprofit organizations.
The Nonfarm Payroll report causes one of the largest rate fluctuations of any news announcement in the Forex market. Therefore, many analysts, traders, hedge funds, investors and speculators often make predictions, analyze NFP to trade in this market.
The NFP report is usually released on the first Friday of each month. It provides the total monthly increase or decrease of paid U.S. workers across most businesses. The growing number indicates economic expansion but it may also make investors worry about inflation.
How does Nonfarm Payroll affect trade Forex?
Many people often wonder what Nonfarm Payroll is, and what relationship it has with Forex. Once you know the Nonfarm Payroll, you will understand why it affects the forex market so much.
The NFP index has a significant influence on the forex market. When the job data is higher than expected, the market tends to be positive and the dollar will appreciate against other currencies. Conversely, if employment is lower than expected, the market tends to be negative and the dollar will depreciate against other currencies.
The NFP index can also influence the decisions of the Federal Reserve System (FED) on interest rates. If the number of jobs increases, the Fed may decide to raise interest rates to control inflation. Conversely, if the number of jobs is lower than expected, the Fed may decide to lower interest rates to stimulate economic growth.
Read and analyze Nonfarm Payroll news
NFP news data provided
After understanding what Nonfarm Payroll is and its impact on the Forex market, we will continue with how to analyze the NFP news. There are 3 essential components of this news that you need to pay attention to:
Previous: Previous period index
Forecast: Forecast index. This is the number that experts predicted from the beginning of the week
Index released this period: official data released by the United States Department of Labor
These three data have a certain spread and it also partly affects the trading emotion. When this data is published, it will have a big impact on the price of the Forex market. Especially when the actual published NFP data is completely different from the forecasted data, the market will have an enormous shift.
To understand Nonfarm Payroll, you need to know the key components of NFP news. The essential components of this news are just as crucial as comprehending what Nonfarm Payroll is.
Non-farm Employment Change
This ratio represents Americans of working age who are employed or looking for work. When this ratio increases, the market is showing signs of positive change. The USD will have a positive change when the actual data is higher than the forecast data and reverse.
However, you also need to focus on the unemployment data. It may increase at the same rate as the labor force participation rate, but this won't have a negative impact on the market. Unless the unemployment rate increases but the labor participation rate decreases, it will lead to negative signals and the dollar will decline.
The 2nd component that is equally important when understanding Nonfarm Payroll, is the Unemployment Rate data. This data also partly reflects the health of the economy. If the unemployment rate increases within 3 months, the dollar will weaken seriously. It is calculated as a percentage of the number of people looking for work to the total number of workers.
Once you have studied Nonfarm Payroll, you will see that a low Unemployment Rate indicates a well-developed economy and there is competition in the labor market. On the contrary, if the unemployment rate rises, this could indicate a difficult situation in the labor market and the economic situation is not good.
Average Hourly Earnings
You also shouldn't ignore Average Hourly Earnings data when figuring out Nonfarm Payroll. Since this is considered an important index of NFP news. It is a crucial indicator for determining how well paid workers are in the American economy.
When learning about Nonfarm Payroll, you will also know if the average wage per hour worked increases, the economy is better. It creates pressure on consumer prices and can lead to higher interest rates. However, if average wages are not rising or falling, this could indicate a bad wage situation in the economy, which could lead to a drop in interest rates and the value of the dollar.
Trade when Nonfarm Payroll news is published
As you know in the section What is Nonfarm Payroll, the NFP report has the most impact on Forex and specifically the USD. And one of the favorite pairs of traders is GBP/USD. In addition, other currency pairs related to the USD are also affected, for example USD/JPY, EUR/USD, USD/CHF, USD/CAD, AUD/USD, etc. Because the Forex market is open 24 hours a day, all trading is possible when news is announced.
Now you can answer the question what is Nonfarm Payroll that affects Forex so much. Because trading when the Nonfarm Payroll (NFP) news is published can provide great opportunities for investors who like to join. However, trading during this time can also carry high risks due to the volatility and unpredictability of the market. So when you don't understand about Nonfarm Payroll, you can stop trading at this moment.
However, if you already know about Nonfarm Payroll, don't want to stay out of the market and want to find opportunities, you can still take advantage of this moment. Of course, trading when the Nonfarm Payroll news is published, you also need to pay the most attention to fund management and risk management. Don't forget to set Stoploss to protect your fund.
Case 1: Actual data is higher than forecast
This is a positive case for the market. When the Nonfarm index is higher than the forecast, the economic situation is improving. The unemployment rate fell, and many workers got jobs. Since then, leading to an increase in the USD, the currency pairs containing USD also increase.
Case 2: Actual data is lower than forecast
When the Nonfarm index is lower than actual, the economic situation is turning negative. This indicates an increase in the unemployment rate, which leads to a decrease in the dollar, and an increase in Gold.
While this strategy can be very profitable, it has some pitfalls to be aware of. The market can move strongly in one direction. During times of high volatility, rates can reverse quickly even after waiting for a pattern to establish. This is why you need to set your Stoploss at the right time.
Rules to keep in mind when trading NFP news
In addition to understanding Nonfarm Payroll and how it affects the Forex market, you still need to keep the following rules in mind for safer trading. The signals can appear in different time frames, so be consistent with each other.
Nothing is done during the first bar after the NFP report (7:30 to 7:45 pm in the 15 minute timeframe).
Bars created during this time frame will have a wide range. Traders should wait for the Inside bar appear after the initial bar (it doesn't have to be the next bar).
High and low rates of this Inside bar are potential entry points. When a subsequent bar closes above or below the bar, market participants enter trades toward the breakout. They can also enter a trade as soon as the bar moves through the high or low, without waiting for the bar to close. Whichever method you choose, be patient with it.
Set a 30 pip stop per trade.
Select maximum two trades. If both stop out, you should not re-enter. Inside bar high and low are reused for a second trade if needed.
After learning about what Nonfarm Payroll is, if you want to trade according to the news, you can read more news related to the Forex market at: https://vnforex.com/
After reading this article, you probably know what Nonfarm Payroll is and how it affects the Forex market, right? You may maximize your potential profit from a major move that almost usually occurs each time the NFP data is posted by managing your risk with a moderate Stoploss.
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