Analyzing the gold price reaction to NFP surprises

• US non-farm payrolls are expected to rise by 140,000 in September.
• Gold will react more strongly to a disappointing jobs report than an upbeat one.
• Gold price’s inverse correlation with the NFP surprise weakens slightly by the fourth hour after the release.

Historically, how impactful has the US jobs report been on the valuation of gold? In this article, we present the results of a study where we analyzed the reaction of the XAU/USD pair to the previous 35 NFP prints*.

We present our findings as the US Bureau of Labor Statistics (BLS) prepares to release its September jobs report on Friday, October 4. Nonfarm payrolls are expected to rise by 140,000, following a smaller-than-expected increase of 142,000 in August.

*I have omitted NFP data for March 2023, which was released on the first Friday in April, due to the lack of volatility on Easter Friday.

Methodology

We plotted the gold price reaction to the NFP print at 15-minute, one-hour and four-hour intervals after the release. Next, we compared the gold price reaction to the deviation between the actual outcome of the NFP release and the expected outcome.

We used FXStreet’s economic calendar for deviation data, as it assigns a deviation point to each macroeconomic data to show how large the divergence was between the actual print and the market consensus. For example, April (2024) NFP data missed market expectations of 243,000 by a wide margin, and the deviation was -1.28. On the other hand, the September (2023) NFP print of 246,000 versus market expectations of 170,000 was a positive surprise, with the deviation of 2.66 for that particular release. A better than expected NFP print is seen as a positive development for the USD and vice versa.

Finally, we calculated the correlation coefficient (r) to figure out in which time frame gold had the strongest correlation with an NFP surprise. When r approaches -1, it suggests that there is a significant negative correlation, while a significant positive correlation is identified when r moves towards 1. Since gold is defined as XAU/USD, an optimal NFP reading should -make it decrease and indicate a negative correlation.

result

There have been 10 negative and 25 positive NFP surprises in the previous 35 releases, excluding data for March 2023. On average, the deviation was -0.65 on disappointing prints and 1.4 on strong numbers. 15 minutes after the release, gold was up $7.61 on average if the NFP reading missed the market consensus. On the other hand, gold fell by an average of $4.86 on positive surprises. This finding suggests that the immediate investor reaction is likely to be more significant to a weaker-than-anticipated print.

The correlation coefficients we calculated for the various time intervals mentioned above are not close enough to -1 to be considered significant. The strongest negative correlation is seen at 15 minutes and one hour, with r around -0.57. Four hours after launch, r margins increase to -0.47.

Several factors could come into play to slightly weaken gold’s inverse correlation with NFP surprises. Hours after Friday’s NFP release, investors may look to book their profits into the London fix, causing gold to reverse course after the initial reaction.

More importantly, the underlying details of the jobs report, such as wage inflation as measured by average hourly earnings and the labor force participation rate, could impact the market’s reaction. The US Federal Reserve (Fed) is sticking to its data-driven approach, and the NFP headline print, combined with this other data, could determine the market price for the Fed’s next policy action.

In addition, revisions of previous readings could distort the impact of recently published data. For example, NFP in February 2024 rose by 275,000 and beat market expectations of 200,000 by a wide margin. However, January’s gain of 335,000 was revised down to 229,000, preventing the USD from benefiting from February’s bullish print.