- Volatility in the forex market is caused by non-farm payrolls (NFP).
- NFP measures net employment job changes.
- To prepare for NFP releases, forex traders use an economic calendar.
What is the NFP?
The key economic indicator for the United States is the non-farm payroll figure (NFP). It is the number of new jobs, excluding those of farm workers and non-profit employees.
Large movements in the forex markets are usually caused by NFP releases. NFP data are normally released every Friday at 8:30 AM ET. This article will discuss the importance of NFPs in economics, and how to use NFP data to your forex trading strategy.
WHAT HAS THE NFP TO DO WITH FOREX?
NFP data is very important as it is published monthly. This makes it an excellent indicator of the state of the economy. The Bureau of Labor Statistics releases the data and the economic calendar will show the next release.
The Federal Reserve Bank considers employment an important indicator. Policy makers will tend to adopt an expansionary monetary policy, which is stimulatory and low in interest rates, when unemployment is high. An expansionary monetary policy aims to increase economic output and employment.
If the unemployment rate is higher than normal, it is likely that the economy is running below its potential. Policy makers will attempt to stimulate the economy. Stimulatory monetary policies involve lower interest rates and a decrease in demand for the Dollar (money flows from a low yielding currency). This article explains how interest rate affect forex.
Below is a chart that shows how volatile forex can become after an NFP announcement. While the expected NFP results for March 8th 2019 were 180k (job increases), only 20k jobs were actually added. The Dollar Index (DXY), which was expected to show 180k job additions, fell in value and volatility.
Forex traders should be cautious about data releases such as the NFP. The sudden rise in volatility could cause traders to lose their positions. Spreads increase with volatility, which can cause margin calls.
NFP - WHICH CURRENCY AIRS ARE THE MOST AFFECTED?
NFP data are an indicator of American employment. Therefore, currency pairs including the US Dollar (EUR/USD and USD/JPY), GBP/USD, USD/USD and USD/CHF will be most affected by this data release.
The volatility of other currency pairs can also increase during NFP data releases. Traders should be aware of this, as they could get stopped. Below is a chart showing the CAD/JPY volatility during the NFP data releases. You can see that volatility increases could cause traders to lose their positions even if they aren't trading currency pairs linked to the US Dollar.
NON-FARM PAYROLL DATES
The Bureau of Labor Statistics normally releases NFP data every Friday at 8:30 AM ET. You can find the Bureau of Labor Statistic website.
We recommend using a pullback strategy rather than a breakout strategy due to the volatility of the NFP release. A pullback strategy requires traders to wait for the currency pair's retracement before entering trades.
We expect the US dollar to decline using the same example (NFP results 20k, vs 180k anticipated). The EUR/USD is used in the following example. We forecast that the EUR/USD will appreciate, despite the NFP data being worse than we expected.
TRADING NFP DATA RELEASES TOP TIPS & FURTHER REVIEW
These are some tips to keep in mind when using NFP data to inform forex trading
- NFP data are released every Friday.
- Increased volatility and wider spreads are a part of the NFP data release.
- Other currency pairs may also experience volatility and wider spreads, even if they are not directly related to the US Dollar.
- The increase in volatility and potential widening spreads can make trading the NFP data release dangerous. We recommend that you use the appropriate leverage to combat this risk and avoid being stopped out.
You should also be aware of other important data releases:
The NFP moves the market generally, but data such as CPI, Fed funds rates and GDP growth are also important.
To learn more about trading news releases, please see our trading the data beginner guide.
FOREX FUNDAMENTALS: ANOTHER READING
We recommend that you learn more about central banks and the role they play in the forex market. Also, what central banking interventions are.
To keep track of all important economic data releases including central bank speeches, interest rate data and more, use the DailyFX Economic Calendar. Bookmark our Central Bank rates Calendar to be prepared for any announcements.
