What is NFP in Forex？

Professional traders often look to economic announcements as reliable indicators. Let's focus on the Non-Farm Payrolls (NFP) data, how it affects the market and how to trade it.

The Non-Farm Payrolls (NFP) data is one of the most watched economic indicators in the forex market and provides important insights into the U.S. job market. Released monthly by the U.S. Bureau of Labour Statistics, NFP data can cause significant volatility and affect currency pairs such as the U.S. Dollar. Understanding how non-farm payroll data affects market movements and knowing how to trade on these announcements is crucial for traders looking to capitalise on this high-impact event. In this article, we will look at what non-farm payroll data is, how it affects forex traders, and effective strategies for trading non-farm payroll data events.

What are Non-Farm Payrolls (NFP)?

Non-Farm Payrolls (NFP) is an important economic event that has a significant impact on fundamental traders. The NFP report is released monthly by the U.S. Bureau of Labor Statistics (BLS) and measures the number of people employed in the U.S. economy, excluding farm workers, nonprofit employees, private household employees, and non-corporate self-employed workers. The report is a key indicator of the health and productivity of the U.S. economy and is therefore an important economic indicator.

The Federal Reserve is charged with maintaining maximum employment in the United States as well as price stability. Therefore, they pay close attention to the nonfarm payroll data when setting interest rate policy. If employment is strong, the Fed may consider raising interest rates. If employment is weak, the Fed may lower interest rates.

Since the United States is the world's largest economy, any move by the Fed will have a significant impact on global financial markets. But most importantly, they can have a major impact on the US dollar, so forex traders will be paying close attention to the non-farm payrolls data and quickly revising their strategies based on the data, or trying to profit from the volatility.

The data is usually released on the first Friday of each month at 8:30 am EST and reflects the previous month's data.

Why Is Non-Farm Payroll Data So Important?

Non-farm payrolls are an important part of the labour force and employment reports are available for all industries. This report highlights trends in the manufacturing, services, and oil and gas extraction industries, helping traders and economists gauge overall economic activity. This employment report affects currency pairs, stock markets, and other financial markets.

Employment Situation Report

The NFP is part of the broader Employment Situation Report, which includes the unemployment rate, average hourly wage, and labour force participation rate. These elements provide a comprehensive picture of the current state of the labour market and help policymakers and traders make informed decisions based on the previous month's data.

How Does NFP Data Affect Markets?

The release of NFP usually leads to significant volatility in the forex market.

If the Federal Reserve decides to lower interest rates in response to high unemployment, this will reduce demand for the US dollar, leading to a fall in its price.

On the contrary, a large number of new jobs (typically six figures, but especially 200,000 or more) could be a positive factor driving the USD higher. Particularly optimistic forecasts prior to the release of the Non-Farm Payrolls data may have the same effect as the Non-Farm Payrolls data significantly exceeding expectations.

It is important for all traders to understand that the NFP data tends to be very volatile even before an outbreak. It does not necessarily follow a gradual upward or downward trend from month to month.

Prior to the release of any macroeconomic indicator, including non-farm payroll data, economists and market analysts provide forecasts or estimates. These forecasts can be found in the updated Non-Farm Payrolls Data Calendar, which shows previous, forecasted and actual Non-Farm Payrolls data.

Deviation between forecast and actual data

When the actual nonfarm payrolls data matches the forecast, the market reaction is minimal because the data is already reflected in asset prices. However, if the actual jobs report deviates significantly from expectations, it can trigger increased volatility. For example, if the report shows that fewer jobs were added than expected, it would indicate a slowdown in the labour market, which could weaken the US dollar. On the other hand, better-than-expected data strengthens the US dollar as the market sees it as a positive sign for the economy.

Impact on Financial Markets

Financial markets (especially the FX market) react quickly to NFP data. Traders can use this data to make informed trading decisions in volatile markets by following the release of the monthly NFP report or by keeping an eye on new NFP news.

How FX traders can take action with NFP data

Forex traders with open positions should always be ready to react to NFP data releases. The danger in simply doing nothing about your position is that a sudden increase in volatility can lead to bigger spreads and margin calls.

Some traders will consider closing all active positions before an NFP release and begin a new pattern of trades after the data is released. Alternatively, you could avoid trading during these releases altogether.

The immediate action tends to be unpredictable as scalpers (traders who look for constant opportunities to lock in multiple short-term trades) enter the fray in a fastest-finger-first race.

It takes a while for currency pairs to start moving in more typical patterns and it is at this point that a wider pool of traders may look to get involved.

Two ways to trade NFP

Before the release:

If you place a trade before the figure is revealed, you are using your skills of deductive reasoning to predict which way the market will go before it actually does. Risk management is vital to using this type of strategy as an unexpected figure can create gaps in the market that could theoretically jump right over any risk-minimizing stops you have in place. Therefore, it is wise to give whatever instrument you choose to trade wide breadth to move and oscillate to give yourself a better chance. Most of the central banks around the world would like inflation to grow at an annual basis of around 2% to 3%.

After the release:

Trading after the release is a little more cautious, but also comes with its own set of risks. The initial knee-jerk reaction to the NFP headline isnt always the “end-all, be-all” of market movement for the day. It has been well documented that markets can mimic a V-shape post NFP, where the spike goes in one direction then reverses in the minutes or hours afterward.

Is there a reliable strategy to use when reacting to NFP data?

As with any aspect of currency trading, it is important to appreciate that no strategy is watertight when it comes to seeking trading opportunities from NFP data.

However, there is one strategy that many traders seem to agree on. Its what is known as the pullback strategy, in which you wait for a currency pair to retrace before entering a trade.

Lets take a historical example: the March 2019 NFP report. The data that day revealed a highly disappointing 20,000 new jobs created against an expectation of 180,000. This data would usually harm USD, causing EUR/USD to rise.

But as you can see, while the graph spikes up rapidly, it falls back equally quickly and in fact comes down below its pre-NFP level.

It is at this point that the pullback strategy would suggest a buy trade should be made with the expectation that the graph is ready to move back into positive territory. And indeed, that is exactly what happens. Look at the big green candle representing the next five-minute period.

What makes the NFP report so influential?

While small changes in employment numbers don't seem to have a major impact on a large economy like the U.S., the nonfarm payrolls report can spark market sentiment. It affects everything from the unemployment rate to the Fed's interest rate decisions.

The Impact of the Establishment Survey and Non-Farm Payroll Data

The Establishment Survey section of the Employment Situation Report collects data on non-farm payroll job gains or losses in the economy. This employment report has a significant impact on the dollar's trading volume. If the nonfarm payrolls report shows positive growth, the dollar strengthens, while negative data weakens the dollar, leading to rapid volatility in the forex market.

Brokers and Volatility Protection

Due to the extreme market volatility caused by the Non-Farm Payrolls report, many brokers freeze market access around 15 minutes before and after the report is released. Entering the market during this time can be risky and traders must be cautious, especially if using high leverage.