What is Non-farm Payrolls?

The non-farm payrolls report (NFP) is a significant market event each month. Here we examine what it is and how it can affect your forex trading.

The NFP is a monthly report that estimates the net number of jobs gained in the US in the previous month, excluding those in farms, private households, and non-profit organizations. It is usually released on the first Friday of the month, in an Employment Situation report that also includes the US unemployment rate, average hourly earnings, and participation rate.

Although its importance has dimmed somewhat in recent years, the NFP is still one of the most significant economic indicators. Pundits from across the financial markets will attempt to predict the headline NFP figure each month, as well as its potential market impact.

Why is NFP important?

The Federal Reserve has the mandate to maintain maximum employment in the US, as well as stable prices. So, they’ll pay close attention to the NFP when setting interest rate policy. If employment looks strong, the Fed may consider raising interest rates. If it is weak, lower rates could be in the cards.

As the US is the world’s largest economy, any actions by the Fed tend to have a significant impact on global financial markets. But first and foremost, they’ll have a big effect on the USD, so forex traders will monitor the NFP closely and rush to amend their strategies based on the data, or attempt to profit from the volatility.

The data is usually released on the first Friday of every month at 8:30 AM ET and reflects the previous month’s data.

How does NFP data affect forex?

NFP releases have a general tendency to cause large movements in the forex market.

If the Fed decides to lower interest rates to combat high unemployment, it reduces demand for the dollar, causing it’s the dollar’s price to fall.

Conversely, a high number of additional jobs (generally, anything in six figures, but particularly 200,000 or more) is likely to be a positive factor in terms of pushing USD gains. A particularly positive forecast ahead of an NFP release can have the same effect as would NFP data which radically outperforms estimates.

It’s important for all traders to understand that even in the pre-pandemic era, NFP data tended to fluctuate wildly. It does not necessarily follow gradual month-by-month inclines or declines.