Forex Trading Library

What to Watch For in May’s NFP

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The Nonfarm Payroll (NFP) is a highly anticipated economic report which signals the strength of the US economy. It is closely analysed to predict Gross Domestic Product (GDP) growth and inflation rates and has the power to move global financial markets. So, lets look at what to watch for in May’s NFP.

Three things about the NFP release:

  • Released on: The first Friday of every month
  • Released at: 8:30 AM ET (Eastern Time)
  • Released by: The U.S. Bureau of Labor Statistics

Three things to note in the report:

  • NFP numbers (number of new jobs created/lost)
  • Unemployment rate
  • Hourly wage (average worker wages)

Forex Market Reaction to the NFP Report Release

The NFP report typically causes big movements in currency pairs, especially those involving the US dollar. The most critical time for forex traders is half an hour before the report is released to around four hours after the release. While this is the period of maximum volatility, NFP could continue to cause price movements in the forex market for a couple of days after the release.

The extent of volatility in the forex market typically depends on the extent of surprise in the report. Even the direction of US dollar movements is determined by whether the surprise is positive or negative.

Let’s take a look at how the forex market reacted to a surprise from the previous report, released on April 6 2018. The number of new jobs created was reported at 103,000. This caused the US dollar to tumble – but why? Well, the reported figure was significantly worse than the previous one, which came in at 326,000. More importantly, it fell hugely short of expectations of 193,000 job additions. In fact, the greenback came under pressure despite the unemployment being at a 17-year low of 4.1% for the sixth consecutive month.

 

May 2018 NFP Report: Predictions

The NFP report in May is expected to show 195,000 new jobs created for April. The market also predicts the May report to show unemployment dropping from 4.1% to 4%.

The estimate for month-on-month growth in average hourly wages stands at 0.2%, versus the previous month’s 0.3% growth. This is in-line with the average growth recorded between 2006 and 2018.

The estimate for year-on-year growth in average hourly wages is at 2.7%. Any move toward the 3% wage growth level could send the US dollar surging, while a decline to the previous 2.5% level could weigh heavily on the greenback.

How to Navigate the Volatility Caused by NFP

Here are a few things to keep in mind:

  • In case you’re risk averse or a newbie, you may decide to close all your positions just before the NFP release. Watch for the dust to settle following the release; and begin placing trades only after a clear direction has been set. Use your usual trading strategy after this initial period of extreme volatility is over.
  • The US dollar will react positively if there’s a positive NFP surprise and negatively to a negative surprise. This reaction is almost immediate. What you must remember, however, is that this immediate response is only to the headline NFP data (of new job creations). Over the next few hours, the market will absorb the other critical numbers in the report (like unemployment rate and average hourly wages) and will begin to reflect those too.
  • Any forex strategy to trade NFP volatility must include what to do just prior to the release, how to trade for a few hours after the release, how to control risk and when to take profits. The position size you take will depend on your risk appetite.
  • While there are several strategies to trade NFP volatility, it’s critical to place stop-loss orders for every trade.

May 4 2018 is an important date, not just for the NFP announcement. The Fed’s two-day meeting concludes on that day and the market awaits an indication of a June rate hike. The Fed’s stance revealed later in the day could significantly impact the US dollar.

 

 

 

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