How to trade NFP, one of the most volatile events

NFP is the acronym for Nonfarm Payrolls, probably the most important economic data release in the world.

The indicator, which provides a comprehensive snapshot of the health of the US labor market, is usually released on the first Friday of each month. The release shakes the financial markets for a long time, generally influencing the prices of stocks, gold, the US dollar (USD) and many other assets.

This makes it one of the best chances for traders to make a profit, although it carries its own set of risks.

Does NFP data offer opportunities for traders?

Yes, enough.

Nonfarm payrolls are a critical indicator of the economic health of the United States, which is the world’s largest economy.

Trading around an NFP release is volatile and can be risky as almost all assets tend to move suddenly within minutessometimes seconds. While some traders prefer to stay on the sidelines during the event, others find opportunities amid these market changes.

A few hours after the release of the data, the markets close for the week. Therefore, merchants – especially those in the great financial center of London – they have little time to react to the data. This fact adds to the rush and high volatility.

The valuation of the EUR/USD pair rose on August 2 in the next hour after the NFP release, when the data came in below estimates. This is because the outcome was not good for the US Dollar, so it propelled the EUR/USD major.

How is NFP traded?

The data comes along with many other indicators. When trading, it is essential to know that the first impact belongs to the headline figure Nonfarm Payrolls – changing the number of jobs. It is expressed in thousands and can be positive or negative.

A positive print means the US economy has created new jobss throughout the month, while a a negative one means that employers are shedding jobs on average.

A few days before the data is released, dozens of economists and analysts present their estimates of how many jobs they think the US economy created (or destroyed) during the month, forming a consensus.

Any significant deviation from this consensus – how far or close the actual figure is to what was expected – usually becomes the main mover of the markets.

It’s difficult to predict how the markets will react, but in general, NFP data that beats consensus tends to push US stocks higher, as they may imply higher company profits going forward.

However, context is also important: when interest rates rise, investors fear that a strong economy will mean even higher rates. In such a case, stock prices may fall despite the economic strength implied by the indicator.

As for the US dollar, the reaction is largely straightforward. A report showing a resilient labor market is generally bullish for the USD because it means a strong economy. Conversely, a weak report means a softer economy, which weighs on the greenback.

However, the US economy leads the world and the US dollar is the world’s reserve currency.

That makes the reaction of the US dollar different in times of crisis. If the US economy is struggling, it means other places are doing even worse. A weak NFP report causes people to flee to the safety of the US dollar. In other words, when things are bad, the US dollar can also gain.

For Gold, an NFP report showing stronger-than-expected jobs growth tends to lead to lower prices. Conversely, a negative surprise – meaning the economy created fewer jobs than expected or even destroyed jobs – supports price increases for the yellow metal.

The price of gold (XAU/USD) rose on August 2 in the first 20 minutes after the NFP release, when the data came in below estimates. However, traders quickly turned around after that and took profits.

Apart from the NFP headline, what data should I be looking at?

The NFP headline data is included in the so-called Employment Report.

This includes a lot of other statistics that traders pay attention to. While the change in non-farm payrolls causes the first big reaction in the markets, the nuances that other indicators bring must be considered once the dust settles, as they could even completely cancel out the first reaction.

Two more components worth watching. The first is Average hourly earningsespecially when inflation is high because they reflect changes in wages.

When people earn more money, higher inflation tends to follow.

When wages fall, price increases tend to moderate.

The second component worth examining is Unemployment rate. When markets are worried about an economic recession—when the economy isn’t growing—they scrutinize every change in the unemployment rate, because a rapid increase in
The unemployment rate is an early sign of a recession.

And that’s not all.

In some cases, the current month’s NFP report includes significant revisions to previous months. While markets are focused on the latest numbers, significant upward revisions make the report look better, and sizeable downward revisions make the response worse.

On August 2, almost all leading indicators in the NFP report came in below what economists expected (red), so the market saw a weak report.

Is there any reasonable strategy to trade NFP data for August?

The NFP data for August is particularly important because the US Federal Reserve (Fed), the country’s central bank, has said it will almost certainly cut interest rates in September.

But investors are wondering whether the Fed will opt to cut interest rates at a “normal” pace or whether it will decide to go further and implement a bigger cut.

So does the Fed care about the labor market? Yes, because apart from controlling inflation, its mandate is to “promote full employment”.

The NFP data holds the key to this, as the July data was weak: just 114,000 jobs were gained in America. Another weak result for August would cast further doubt on the health of the labor market, prompting the Fed to go for the big rate cut scenario, as lower interest rates help the economy grow faster and thus create more jobs.

Economists expect nonfarm payrolls to rise by 160,000 in August, more than in July. Here are some scenarios of how core assets could move depending on the NFP result:

1. Investors want a result of 150,000-200,000, which would weigh on the US dollar while boosting gold and stocks.
2. A bigger increase of 200,000 to 250,000 jobs would boost the US dollar and hurt gold, but not that much.
3. A blockbuster of 250,000 or more would mean the job market is still very good, leading some to doubt the Fed will significantly cut interest rates in the next few months. This scenario would send stocks and gold lower while supporting the US dollar.
4. A figure of 100,000 to 150,000 would be somewhat disappointing, but would increase the chances of a big rate cut, boosting gold and hurting the US dollar. Stocks would slide, but not crash.
5. Any reading below 100,000 would prompt recessionary concerns. While gold would benefit, the US dollar could see a rally triggered by safe-haven flows. Stocks would tremble.

FXStreet covers Nonfarm Payrolls live, providing insight into all components and their impact in each release.