When the NFP is released, the whole Forex market moves and traders see aggressive spikes or dips on all currency pairs. This tells much about its importance and here are some things that make this release so crucial for the Forex dashboard.
It all comes from the Federal Reserve’s mandate. This is no regular central bank, but the most Important one in the world, as it sets the interest rate and the monetary policy for the U.S. dollar. The dollar is the world’s reserve currency, and the interest rate for it affects the whole world.
Financial system
The financial system as we know it is centered around the U.S. dollar. Global financial organizations, like the IMF (International Monetary Fund) and other financial institutions loan money in dollars. Eventually, these dollars need to be paid back. If the interest rate on the dollar is rising, the countries, or entities that borrowed when the interest rates were low, need to pay more to repay the loan. Therefore, what the Fed is doing with the interest rates matters for the whole world, not only for the United States. From this point of view, the Fed is viewed as the world’s central bank.
The Federal Reserve’s mandate is a dual one: to keep inflation below or close to two percent and to create jobs.
Therefore, jobs are used when deciding to hike or not the rates. The NFP is the main jobs data during a trading month, so it is crucial for the Fed’s decision. There are other jobs indicators or economic news in a trading month, like the Initial Jobless Claims and Continuing Claims (these are released weekly, on a Thursday, and refer to the previous week), the ADP on the first Wednesday of the month (these are the private payrolls), and so on.
But none is so important as the NFP number.
Unemployment Rate indicator
The NFP release comes together with the Unemployment Rate indicator on the first Friday of every month. When this is due, the trading week is a ranging one for the Forex market and after the release traders start positioning for the next time the Fed meets to see how the monetary policy changes in the meantime and how to react.
The NFP is traded heavily by algorithms (trading machines, robots, super-computers that buy and sell hundreds and hundreds of trades per second) and, because of that, fake moves are the norm. When the actual number differs from the forecasted one, and not only, the market travels. Usually, traders try to position for the NFP in advance, looking for clues from other economic data, like the ADP, or the private payrolls. It is believed that private payrolls and the NFP data are linked in a directly correlated fashion, but this is not holding true all the time.
Other things traders do is to look at the employment component in the ISM (Institute for Supply Management) releases, like the Manufacturing and the Non-Manufacturing ones.
If the services sector has a strong employment component, the chances are that the strong employment level will be seen in the NFP release too. The unemployment rate is part of the Fed’s decision-making process to move on rates too. As a rule of thumb, a lower unemployment rate is better for the economy, as jobs are created and this will result in the Fed hiking the rates. Higher rates lead to higher dollar and traders will buy it.
There is no such thing as full employment in an economy. A labor shortage already appears when the unemployment rate falls below 4 percent and experienced traders know that. Forex trading is about anticipating what the central bank is going to do with the interest rates at the next meeting, and the NFP is the perfect economic release to position on the right side of the market.
