When deciding to invest money in the financial markets, it’s essential to be aware of what makes the assets you trade go up or down, so then you can more efficiently take advantage of market opportunities. In Forex trading, the NFP (or “Non-farm Payroll”) report is one of the most important economic data, as it gives FX traders an idea about potential future moves from the American central bank, the Federal Reserve.
What is the NFP?
The Non-farm payroll report (NFP, sometimes also referred to as the Employment Situation) is essentially what it sounds like – a monthly payroll report of those employed in the US workforce, excluding farm workers. It also happens to exclude those who work in not-for-profit organizations, those from private households, and government employees. It roughly equates to 80% of the total workforce.
Within each NFP report is published a number of key features. Most important of which is the rate of unemployment relative to the whole workforce, which sectors of the economy showed increases and decreases in employment, the hourly average wage, and what revisions have been made relative to previous reports.
These stats, released on the first Friday of every month by the Bureau of Labor Statistics (BLS), provide an invaluable insight into the overall state of the US economy, and have a large bearing on the decisions of the United States Federal Reserve (Fed).
Why is it important for the Federal Reserve?
When the Fed meets at one of their eight meetings a year to determine interest rates for the coming period, they’re looking at a number of factors, chief of which is the rate of inflation and the employment situation, which can be found in the NFP report from the previous month.
As the Fed aims to maintain its dual mandate of price stability and sustainable employment conditions, it relies on the NFP for information on the trends in the US employment market and in wage inflation. If its monetary policy needs to be adjusted, the Fed will do so based in part on this information.
Generally speaking, the more jobs that are created and filled, the better the economy looks. Greater employment numbers generally correlate to more consumer spending, which equates to more than 60% of the GDP in the US.
With this in mind, the Fed will likely increase interest rates If the unemployment rate is also low, then the same likely applies – the economy looks in good shape, and interest rates may increase.
How does it influence the Forex market?
With the release of the monthly NFP, FX traders and investors scan for the overall state of the US economy, how that might influence monetary policy in the near future, and therefore, which currency pairs should they focus on.
It’s one of the most anticipated economic news reports for FX traders, and during the first few minutes to hours of its release, there will often be large price movements in certain currency pairs linked to the USD, like the EUR/USD, the GBP/USD and the JPY/USD.
This report often comes with higher volatility, so it’s important to be prepared for increased risk while the market chooses which direction to move.
A positive report, showing an increase in jobs, may attract investment from other countries as they expect strengthening economic growth, which would drive up the USD, especially if interest rates might be increased. The opposite would be true of a report showing a declining economy.