What is NFP in Forex Trading? How can it be Used in Forex Analysis?

The non-farm payroll (NFP) is a term commonly used in Forex fundamental analysis.

Basically, NFP is an economic indicator that shows the state of the U.S. Economy every month.

This tool measures the number of jobs added to the U.S. economy, excluding government employees, private household workers, employees for non-governmental organizations, and farm employees.

NFP data is often released in the first Friday of every month by the Bureau of Labor Statistics. The data is always posted on the economic calendar of trading platforms.

If you are a serious trader, you must be having the calendar as an app in your phone.

Why you should know market fundamentals such as the NFP in Forex trading

Such economic indicators often move markets. When a major economic event takes place, there is always a high volatility in the Forex market.

Relying on technical analysis alone can wipe out your equity in seconds. As a small trader, you need to anticipate events that can significantly move the market so that you can close pending orders and revise your leverage, or stop trading altogether until the market volatility reduces.

How does the NFP Affect Forex Markets?

NFP is a very crucial economic indicator when it comes to forex trading.

Firstly, it is significant because it is released monthly, so it will affect Forex Trading quite a lot.

Secondly, employment is a very important economic indicator in the United States, often used by the Federal Reserve to make important policy decisions such as monetary expansion and economic stimulation.

When unemployment is low, the Federal reserve might make expansionary monetary policies such as lowering interest rates to boost the economy.

Lower interest rates reduce dollar demand, leading to under-performance against other currencies in the market. This might cause significant sudden fall in major currency pairs such as EUR/USD, GBP/USD, USD/CHF, and USD/JPY.

How to Trade Forex Using NFP Data

When NFP is released, as we have said, volatility is high in the market. If the NFP unemployment rate becomes higher than the expected rate, the dollar demand will rise.

On the other hand, if the NFP unemployment rate is lower than the expected rate, then the dollar demand will go down.

How to use NFP in forex trading

To make profits with NFP, you need to accurately predict the unemployment rate movement. If you anticipate the data to be lower than the expected, you better sell your dollar.

You will have to buy the dollar if the unemployment rates are higher than the expected.

When the data is released, use the outcome to your advantage. For instance, if you are trading EUR/USD, and the NPD data turns out worse than the expected rates, the EUR/USD will rise.

how NFP affects Forex trading

 

Wait for pullback, then aim for next resistance level, and there you have your profits.

In summary:

  • The U.S. Bureau of Labor Statistics releases the NFP data every first Friday of the month
  • The release of NFP data causes immense volatility in the market.
  • It is not a good time for small traders to trade with high leverage during high volatility periods
  • Major currencies involving the USD are most affected when the NFP data is released
  • NFP affects even the other currency pairs that do not have the USD
  • Widening of spreads and high volatility during NFP data release periods could cause increased losses

Other economic data indicators that affect Forex trading include: CPI, Fed funds rates, and GDP growth.

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