At the start of each trading session, you will receive an email with the author's new posts. Analyst at Forex Crunch - Career: Graduated from law school in Toronto. Former account manager at Bendix.
Senior writer at Forex Crunch. It is a given that there is an element of risk in trading FX. However, an understanding of some basic concepts about major economic indicators, such as the Non-Farm Payrolls report , can minimize some of that risk. Financial markets in the US, Europe and around the world react, often sharply, to global economic events.
These events can also have a significant impact on the currency markets, so it is important for currency traders to monitor the release of major economic indicators, such as US Non-Farm Payrolls NFP. It is published by the US Department of Labor. It provides a look at the health of the US economy in general, and the labor market in particular.
As one of the most important economic indicators, the NFP release can have a major impact on the forex markets and can affect the direction of the US dollar. This means that traders should always treat the NFP report as market-moving data. A NFP which is stronger than the estimate also known as the forecast indicates that the labor market is stronger than what the markets expected, and the dollar often rises as a result.
Let's use a stock market analogy to answer this question. Just like a company's stock often rises after the company releases a strong financial report, so to the US dollar can be thought of as the "stock of the US economy".
Thus, when the US releases a strong economic report, the "stock" US dollar often rises against other currencies such as the euro, pound or yen as a result. Conversely, a weak NFP report indicates that the labor market is weaker than what the markets anticipated, and a weak reading can push the dollar lower against other currencies. Mark your economic calendar so that you can monitor the release time of NFP.
Each report covers the employment change measured in the previous month. The June report, released on June 5, covers the employment change measured in May. Similarly, the May report, released on May 8, covers the employment change measured in April. The chart shows the following: When trading based on economic events, it's always a good idea to be well-versed with that particular sector of the economy.
So, for trading based on the NFP, a trader should have a solid understanding of employment conditions in the US. The more knowledge you have, the more confident you will feel trading the NFP. Don't accept the market estimates as written in stone; they are often well off the mark.
Ask yourself if you think the NFP will improve or lose ground in the next release. If, for example, you feel that the NFP may move higher, then there's a strong chance that the US dollar will move higher following the release we'll explain why shortly. Keep current on financial news, especially on the US labor market and employment conditions. This will help you trade the NFP. This uncertainty can lead to volatility in the forex markets, as traders and investors anxiously await the release.
Trading during this time carries additional risk, as the markets do not have any solid data to work with prior to the release. Nonetheless, the volatility often seen prior to a major event does present trading opportunities. We noted earlier that the NFP is a major economic indicator, and that there is a strong likelihood that the currency markets will move after the NFP is released.
Will the US dollar move up or down? That of course, is the million dollar question which nobody can predict, but we can use a general rule to help us make an educated guess: If NFP showed a higher gain in the current reading compared to the previous reading, but fell short of the estimate, the dollar could still rise because the indicator improved in actual numbers, despite falling short of the estimate. There is of course, the possibility that the markets will not show much movement at all following a major release like NFP.
This could happen if the actual reading is close to the estimate. However, if the reading is significantly higher or lower than the estimate, there is a strong chance that the dollar will respond with some movement.
Economic indicators like NFP are considered short-term market movers. This means that the dollar often reacts immediately after the indicator is released, but in some cases, the NFP reading can affect the markets for up to 2 or 3 days.
This means that market volatility is most likely right after the release of NFP, but the markets can experience volatility well after the actual release time. If there is volatility after the NFP release, it is likely to be at its strongest in the first few hours after the release. Information on these pages contains forward-looking statements that involve risks and uncertainties.
Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress.
All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. Close alert Thanks for following this author! Close alert You've unfollowed this author. You won't receive any more email notifications from this author. Background Financial markets in the US, Europe and around the world react, often sharply, to global economic events.
Effect of NFP release on the markets When trading based on economic events, it's always a good idea to be well-versed with that particular sector of the economy. Trading after release of NFP We noted earlier that the NFP is a major economic indicator, and that there is a strong likelihood that the currency markets will move after the NFP is released.
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