What are NFPs (Non-Farm Payrolls) - NPF in Forex Trading

When the weather conditions seem especially volatile, with crosswinds coming in from several directions, some surfers elect to sit the day out. The more experienced ones, however, are able to identify the direction from which each wind is blowing, and even predict the overall result. These surfers need not be intimidated and, indeed, could end up enjoying one of their best surfing days of the year.

Anyone who is readying to enter the global forex market also finds himself at the confluence of various forces acting in different directions. Some of the factors that influence the movements of currency pairs include inflation statistics, political news, commodity prices, global trade deficits, and the stock market. The task of figuring out which way a particular currency is likely to go may seem complex, but that doesn't mean there’s no way of doing it. Much like in the world of surfing, there are experts who are skilled at determining the likely outcome on a given day.

One of the tools the experts use is called an NFP (Non-farm Payroll) report. When you hear this term used on the financial news, it may sound extremely obscure. Indeed, what have farms or payrolls got to do with forex trading? In this article, we’ll start by explaining the meaning of NFP, but we’ll also initiate you into some real examples of NFPs triggering exchange rate action. The aim is for you to become one of those experts in your own right.

What is an NFP Report?

Economists, policymakers, and financial traders search for ways of gauging the state of the economy because they need to know what to expect down the line. For this reason, they keep a close eye on inflation reports, GDP reports, and housing statistics. Aside from these, one of the key data releases they mark on their economic calendars is that of the US Non-Farm Payroll report, which emerges on the first Friday of every month. The most watched statistic in this report is the number of new jobs added in the United States during the previous month. You will often find this number quoted in the news headlines.

We have now explained the word “payrolls”, because it refers to those of the newly employed workers in the US. But why are we excluding farmworkers? It’s not because we dislike them in some way. The reason is that the nature of their work tends to be seasonal, so they might confuse our data. It’s not just them we exclude, though. Government officials, domestic household workers, nonprofit workers, and the self-employed also don’t make it into the report. The idea is to get a realistic picture of how many GDP-enriching jobs are being created by the economy. If the number is high, it means the economy is chugging along well.

The NFP report also offers other ways of assessing the health of the economy. For instance, it will tell us the overall unemployment rate, which is very significant in this regard. It will also reveal the participation rate, which is the proportion of people over the age of 16 who are either employed or searching for a job. If unemployment is low, it’s usually good news for the economy. In the minds of economists, all this information is crucial because it helps determine the direction the stock market will head, not to mention Treasuries and the price of gold. But there’s another group of people who watch the NFP report with an eagle eye: forex traders.

NFP in Forex Trading

Broadly speaking, the market impact of a weaker-than-expected NFP report will be to encourage selling of the US dollar. The reason is that the information implies the US economy is weaker than we had thought, which could mean the dollar will meet with downward pressure. Either a rise in unemployment or a drop in new jobs is likely to trigger this reaction. Conversely, if the NFP report shocks us with its high numbers, traders may choose to buy the USD because of this sign of economic robustness. A drop in unemployment would normally have the same effect.

These effects are not uniform, however. For various reasons, exchange rates may react differently to these stimuli in a given situation. This is why many forex traders tend to wait on the sidelines and watch what happens to prices after the reports’ release. This isn’t only because they’re unsure which way prices will go. It’s also because they know everyone else is unsure too. The initial market reaction might, for instance, be an exaggerated surge in the USD but, after traders begin to appreciate the significance of all the information in the report, they could swing the other way and sell the dollar. This is why forex traders tend to give the market time to ponder the meaning of the report before acting.

Once the initial volatility has subsided, though, how will you know what position to take? A popular strategy is to watch for the appearance of an inside bar on your price chart. This can be a fifteen-minute period, occurring after the market’s knee-jerk reaction, in which prices remain entirely within the previous bar’s range. In other words, prices are not breaking new ground and seem to have stabilized. Then, when a new bar (it need not be the following one) breaks away, either up or down, you could open a deal in the same direction. We now have a conviction that the market has chosen a path and we’re going with it.

A common time to close the trade would be four hours later, when the aftershocks of the report’s release have usually subsided. Take note that prices won’t always behave the way you expected. Sometimes they’ll reverse and change course even after setting out in a particular direction.

Examples for NPF Meaning

1. February 2023

Let’s go back to February 6, 2023, when those trading the popular EUR/USD currency pair watched the dollar surge to a four-week high against the euro. Besides the euro, the British pound and the Japanese yen also lost ground against American currency. What had catalyzed the dollar into this dominance over its peers? John Doyle of Monex USA answered that “Friday’s NFP number solidified the likelihood of another 25-basis point hike… sending equities lower and the greenback soaring”. An especially robust NFP report showed job growth was on the rise, but also that unemployment was at its lowest in 53 years. Doyle points out that the strong data were likely to encourage more interest rate hikes since they showed that hawkish Fed policy had not weakened the economy. The impact of higher interest rates is dollar bullish, which explains the surge in the USD.

2. June 2023

In early June 2023, the NFP report showed that 339,000 new jobs had been created in May – much more than the anticipated 190,000. However, on the unemployment front, the situation got a bit worse: the overall unemployment rate rose from 3.4% to 3.7%. Besides this, there were other bearish forces acting on the dollar: the debt ceiling crisis had recently been resolved, which drained away the safe haven appeal of the USD; and the Federal Reserve had indicated they might forgo hiking interest rates that month. Still, in this case, the net result of the NFP report was bullish for the USD, as could be seen in the elevated dollar index. Here we see the power of the headline NFP numbers to counteract multiple opposing data points.

3. November 2022

The third example, from November 2022, shows these forces acting out in a different sort of way. As in the previous case, the jobs report showed high numbers (261,000), but the unemployment rate had also increased (from 3.5% to 3.7%). The dollar’s initial reaction was to surge but, after traders considered the significance of the full report, it was sold off. Market participants inferred that, overall, the data was weak enough to suggest the Fed would hold back on interest rate hikes or, at least, slow them down. As a result, the dollar index slipped as much as 1.9% in a single day.    

Tying Things Up – In Conclusion

We hope we’ve offered up a helpful introduction to NFPs and the role they play in forex trading. Our suggestion is that you continue to read financial news articles explaining how the NFP worked on other occasions, among the various competing forces, to determine exchange rates. And, when you’ve done a substantial amount of reading, it’s a great idea to try out trading the NFP on iFOREX’s free demo account to get yourself into the action. Through this, we hope you’ll gain a finer feeling for this tool and, eventually, make use of it to confidently surf your way through the stormy seas of forex to success.