Non-Farm Payrolls: How They Affect Forex Trends

By: Carl Hayes

Followers of financial news will notice that the markets react with great volatility to certain types of data. A surprise in an important piece of financial release can cause sharp swings of a couple hundred pips in a short time, constituting an impossible situation for the trader who wants to trade the markets on the basis of technical or fundamental analysis. But what about trends that last days, week, or months? News are not released every second (or if they are, not every piece of news is equally significant for the markets), but market action in the forex market last twenty four hours a day. In essence, there must be some pieces of news that affect the market beyond the turmoil that follows immediately after the release. In this article we’ll take a brief look at the non-farm payrolls release, which is one such piece of data with a long-lasting impact on the markets. Certainly understanding the meaning of this release is crucial for anyone seeking to learn forex online.

One of the most important drivers of the long-term price action in all financial markets, including the bond and forex markets, is the non-farm payrolls release. This data simply states the health of the U.S. labor market on the basis of the hirings or layoffs at American firms. It is released on the first Friday of each month by the BLS (Bureau of Labor Statistics) and is received with great excitement and turmoil by market participants. It states the sectoral and demographic breakdown of the past month’s net hirings (or layoffs), and provides some very important information on the weekly and monthly hours and compensation of U.S. labor.

What is behind the great importance of this piece of data for traders and policy makers? We all know that employment is an extremely crucial component of social stability and welfare. Unemployed citizens have difficulty catering to the needs of their families, and dissatisfaction and disillusionment about the society at large can eventually translate to social unrest if not taken care of swiftly. In addition, since the employed population is the backbone of any modern economy, changes in employment statistics are crucial in determining the future economic dynamic of a nation. Workers create products which are then consumed by the population at large, and as living standards increase, demand for new and more sophisticated products ensure continuous progress and economic prosperity. High employment ensures that each citizen can live life to its full potential, creating new demand, and ensuring a higher potential GDP growth, which is crucial for all financial markets. In short, the non-farm payrolls data is the barometer of long term health of an economy.

Although traders do not necessarily think about this while buying and selling currencies, these facts are always in the minds of the larger actors that create forex trends. By keeping an eye on this data, and carefully considering its long term consequences for the economy, traders align themselves with the most powerful players in the financial world. Long term trend following is proven to be the most profitable financial strategy over the years, and if that is your choice of style, understanding the NFP release must be one of your priorities.