NFP (Non-Farm Payrolls): Meaning and How to Trade in Forex

Non-farm payrolls, or NFP, is an economic indicator that estimates the total number of jobs gained or lost in the U.S. economy for the past month, excluding jobs in farms and other categories. NFP is part of the monthly Employment Situation report released by the U.S. Bureau of Labor Statistics (BLS) on the first Friday of every month.

The NFP meaning implies that some jobs (non-farm) are excluded from the report. There are five categories of jobs excluded from NFP reports. The jobs excluded from the NFP are farm employees, government workers, private household employees, employees of nonprofit organizations, and self-employed individuals.

The five categories of jobs excluded from NFP are listed below:

• Farm employees: Workers employed in farming, forestry, fishing, and any other agriculture subsector are excluded from NFP due to agriculture’s seasonal variability. Including agricultural jobs data in NFP leads to fluctuations in employment numbers that don’t reflect the broader economic trends.
• Government workers: Federal government employees, including elected officials, active military personnel, and some agencies like the CIA, are excluded from NFP reports to focus on the private sector’s employment trends and economic activity.
• Private household employees: Workers employed directly by households, such as nannies, maids, and gardeners, are excluded from NFP since these jobs don’t reflect the broader business economy.
• Employees of nonprofit organizations: Workers employed by nonprofit organizations engaged in charity work, religious services, or other non-commercial activities are omitted in NFP, as their funding and employment levels don’t directly reflect economic conditions.
• Self-employed and unpaid family workers: Individuals who run their businesses or work for family businesses without a formal salary are excluded from NFP since their income isn’t tied directly to economic trends.

Non-farm payroll is a key economic indicator that traders, investors, and policymakers track to understand the overall health of the U.S. economy and the labor market.

NFP data releases usually significantly impact price movements in US-related markets. Individuals who want to learn Forex trading terms for fundamental analysis look to NFP reports for guidance on whether the U.S. economy is strengthening or contracting.

NFP in Forex refers to the monthly report from the Bureau of Labor Statistics that tracks employment changes in the United States, excluding non-farm jobs. NFP report data releases lead to significant volatility in the Forex market because they affect the U.S. dollar’s (USD) performance.

Most major Forex pairs, such as EUR/USD, GBP/USD, and USD/JPY, experience sharp price swings after the NFP data release because they involve the U.S. dollar. This volatility provides multiple trading opportunities for traders if they can accurately predict the market reaction.

A positive NFP report indicates a significant job increase and a strengthening US economy. Traders interpret positive NFP data as bullish for the USD and increase their expectations of higher interest rates from the Federal Reserve (FED), leading to traders buying the currency.

A negative NFP report indicates low job growth or losses, suggesting a weakening US economy. Traders interpret negative NFP data as bearish for the USD and increase their expectations of potential interest rate cuts, leading to traders selling the USD.

Non-farm payroll data is important in Forex because it influences the interest rate differential between the USD and other foreign currencies.

The Non-Farm Payrolls (NFP) report holds significant importance in trading due to its influence on the United States economy and the U.S. dollar. NFP reports enable traders and investors to gauge the U.S. economic health, influence monetary policy, impact financial market volatility, and affect trading strategies. NFP data enables traders to make informed decisions before entering or exiting trade positions.

NFP reports provide a reliable gauge of the health of the U.S. economy. Strong job growth signals a robust economy and expanding labor market, while weak job growth signals a weak economy contracting.

The Federal Reserve watches NFP releases closely when making their monetary policy decisions. A strong NFP report often leads to interest rate hikes to control inflation caused by more people having jobs and spending more. A weak NFP report prompts the Fed to lower rates to stimulate the economy when there’s limited money in circulation since fewer people have jobs and opt to save money rather than spend.

Non-farm payroll data release causes substantial volatility in the Forex market, especially in major currency pairs involving the dollar. Traders find short-term and long-term trading opportunities in price fluctuations caused by NFP volatility, leading to higher potential returns.

NFP report releases impact sentiment in other financial markets like stocks by providing insights into consumer spending and corporate profitability, which boost stock prices. Commodities and bond traders look to economic growth and labor data to gain clues about future inflation and monetary policy, allowing them to make informed NFP trading decisions.

Traders and investors often change trading strategies before and after releasing NFP data. The traders position their trades ahead of the NFP release based on expectations derived from other economic indicators and adjust the positions once the NFP data is released. The actual NFP numbers allow market participants to capitalize on the resulting volatility and shift in investor sentiment.

Non-farm payrolls show the number of people employed in private sectors like manufacturing, goods, and construction companies. NFP numbers provide a snapshot of the job market, determining the net change in employment from the previous month. The U.S. Bureau of Labor Statistics (BLS) collects the employment data, calculates the change, and releases the report every first Friday of the month at 8:30 AM Eastern Time.

BLS begins data collection throughout the month by conducting two main types of surveys: the establishment and household surveys. The establishment survey involves nearly 147,000 businesses and government agencies, covering around 697,000 work sites, and gathers information on employment, hours worked, and earnings. The household survey is conducted with around 60,000 households and provides data on individuals’ labor force status, including employment and unemployment rates.

The Bureau of Labor Statistics excludes data from categories like government workers, farm or agriculture employees, private household employees, and nonprofit organization employees when comparing the current month’s payroll figures to those from the previous month. BLS excludes these categories to ensure that only data from non-agricultural sectors that directly reflect the country’s economy are processed to achieve consistency and accuracy in their reports.

The complete NFP report includes the headline total non-farm payroll number, unemployment rate, average hourly earnings, and the labor force participation rate. The Bureau of Labor Statistics releases the NFP report on the first Friday of each month at 8:30 AM Eastern Time. For instance, a 200k+ NFP reading means that more than 200,000 jobs were created in all non-agricultural sectors.

Many economists and analysts release their projected forecasts before the actual NFP release. Traders note these predicted figures to understand how the markets react to NFP news. Markets often react wildly if the NFP numbers differ vastly from predicted or estimated numbers. Market volatility remains relatively flat if the actual NFP data aligns with the expected numbers.

NFP data isn’t a leading indicator in the Forex market, meaning it doesn’t predict the future, but understanding it provides valuable insights into market sentiment and trading decisions.

Non-farm payroll data impacts the short-term volatility of the Forex market by triggering wild price moves in currency pairs. A higher-than-expected NFP data release suggests that the U.S. economy is doing well, driving the US dollar higher against a basket of currencies like the British Pound, Euro, and Japanese Yen. Lower-than-expected NFP readings push the USD lower against other currencies.

The high volatility experienced during NFP releases results in wider spreads than usual, as fewer willing buyers and sellers are present in the Forex exchange markets during this period. Brokers and liquidity providers widen spreads as a risk management measure against extreme price fluctuations.

An example of the impact of an NFP release that influenced the markets is the February 2023 NFP data report. Analysts expected 185K job growth, but the actual numbers reached a strong 517 K. The dollar strengthened due to the positive headline data, with major currency pairs like EUR/USD and GBP/USD losing over 100 pips in just under 30 minutes of the data release.

The NFP week in Forex is usually the first Friday of every month at 8:30 AM ET. The NFP week in Forex only changes during holidays and other unforeseen circumstances. Traders and investors anticipate the NFP data throughout the NFP week, starting Monday, to take advantage of any trading opportunities and adjust positions when market conditions change.

Trading volume during the NFP week in Forex typically decreases the closer it is to Friday and then drastically increases after the NFP data is released. This volume fluctuation arises because investors and traders are cautious of the news and don’t want to be caught on the wrong side when the labor data is released.

The non-farm payroll report affects exchange rates by influencing the performance of the U.S. dollar in the Forex market. The USD is the world’s reserve currency, meaning that most businesses and countries settle international transactions using the currency. A high NFP data indicates a stronger USD and increases the exchange rate between the dollar and a foreign currency.

An exchange rate is the value of one currency relative to another. For instance, the exchange rate between the Euro and the US dollar is 1 USD = 0.88 EUR if 1 USD can be exchanged for 0.88 EUR.

A high NFP number and wage growth show that the economy is doing well, which may prompt the Fed to raise interest rates, driving up USD prices. Higher USD prices mean that traders have to spend more of their local currencies to purchase the USD to complete transactions.

A study by Pathberiya et al. (2015) titled “Modeling the EURUSD Return Volatility on the Days of Simultaneous Releases of Economic Indicators Unemployment Rate and Non-farm Payroll” observed that NFP surprises (where actual numbers are higher or lower than expected) impact exchange rates significantly especially for currencies with a higher trade intensity with the US, such as the Canadian dollar and the Mexican peso.

The study found that periods of high economic uncertainty, such as during the 2008 global financial crisis, have a greater direct impact on NFP data outcomes and EUR/USD exchange rate prices. This suggests that the “exchange rate definition” of currencies is more sensitive to NFP announcements, and exchange rates will often rise or decline depending on the NFP headline numbers released.

NFP data releases cause fluctuations between dollar-related currency pair exchange rates, subjecting traders to unstable exchange prices.

There are six steps to trading NFP in Forex. First, analyze the market consensus and predicted numbers. Second, choose a currency pair. Third, define the trading strategy. Fourth, implement risk management. Fifth, adjust the strategy based on the released data. Finally, practice on a demo account.

1. Analyze the market consensus and predicted numbers: Look at the economic calendars and analyst reports for insights on expected job numbers and wage growth.
2. Choose a currency pair: Pick a currency pair like EUR/USD, GBP/USD, or other dollar-related currencies that experience the highest volatility around NFP releases.
3. Define the trading strategy: Decide the strategy or approach to use once the data is released. The Forex (FX) trading strategy could be scalping, trend-following, breakouts, etc.
4. Implement risk management: Set clear stop-loss orders to limit potential losses and determine how much to risk per trade (position sizing), depending on the strategy’s risk tolerance and account balance.
5. Adjust the strategy based on released data: Compare the actual figure to the forecast and review the entry and exit points based on the implications of the data for the economy and monetary policy.
6. Practice on a demo account: Practice the trading strategy on demo accounts before risking real capital on the markets. Demo accounts allow novice traders to hone their skills, ensuring they can handle the volatility accompanying NFP news releases.

Forex broker platforms manage trading during the release of NFP reports by widening spreads, increasing margin requirements, imposing temporary trading restrictions, and adjusting their execution policies to manage slippage. Many Forex broker platforms send out alerts or notifications to clients about the upcoming NFP release, giving them time to prepare their strategies and adjust positions accordingly.

Forex broker platforms use a dynamic spread adjustment approach, widening bid-ask spreads to manage the increased risk and volatility during high-impact NFP releases. The broker platforms accompany wider spreads with increased margin requirements around the NFP release, meaning traders must put up more capital as collateral to open and maintain positions.

Some Forex trading platforms temporarily halt or restrict trading by disabling pending orders and limiting maximum trade sizes around NFP releases. Temporary trading restrictions protect Forex trading brokers and their systems from extreme market volatility.

Forex trading broker platforms adjust their order execution policies during NFP data release, limiting the chances of slippage. The broker platforms may limit the types of orders that can be placed, ensuring that the execution price of an order doesn’t significantly differ from the intended price.

Forex traders utilize the NFP data to understand how their Forex broker platforms, for instance, MetaTrader 4 and 5, behave during high-impact news releases, which helps them adjust their trading strategies accordingly.

Forex traders utilize NFP reports to understand market sentiment, identify trading opportunities, avoid whipsaws and erratic market volatility, and prepare for effective risk management. Forex traders make informed trading decisions by monitoring and comparing the NFP consensus predictions against the actual data. The traders study historical NFP data to understand repeating market reactions that could help them anticipate potential price volatility.

A higher-than-consensus NFP reading implies that the US economy is strong. Traders and investors tend to be bullish on the USD after a positive NFP reading. A weaker-than-consensus NFP reading shifts investor sentiment bearish, and the USD could plummet as it implies a contracting US economy. Traders who understand the interpretation of NFP numbers trade in line with market sentiment and get accurate trade entries and exits.

Forex traders utilize NFP data releases to determine when to expect market volatility and price fluctuations. Research from NYU by Levent Tuysuzoglu highlights how macroeconomic data, including NFP, significantly impacts implied volatility in financial markets, which is crucial for Forex traders. The University of Florida also emphasizes the importance of understanding NFP data in macroeconomic analysis, indicating its relevance in predicting market movements.

Trading around NFP releases involves large price whipsaws as the market makes false moves before reversing due to the increased volatility. Many Forex currency traders wait for this initial post-NFP volatility to subside before placing trades when the market is calm and shows a clear trend direction. Experienced traders may choose to fade the NFP reaction if they anticipate an overreaction and take a position opposite the initial.

The insights provided by NFP data enable traders to modify their risk management techniques for short-term strategies like scalping and long-term positions.

Traders monitor the markets before and after the release of NFP. The market reaction before and after the NFP release informs the trader’s decision to open or exit a position or tighten or trail stop-loss orders.

The best times to trade NFP are listed below.

1. Before the Release of NFP.
2. After the Release of NFP.

The NFP week from Monday to Friday before 8:30 AM offers multiple trading opportunities for traders. Traders use market consensus or forecasts and other economic data, such as the ADP employment reports, the weekly jobless claims data, and the Job Openings and Labor Turnover Survey (JOLTS) report, to guide them in positioning their trades based on the anticipated outcomes.

For example, EUR/USD traders may open a short position before the NFP release if the market expects the jobs numbers to beat the consensus, meaning the dollar will strengthen.

The most common news trading strategy is the Straddle Trade, in which traders place buy and sell stop orders above and below the current price level before the NFP release. When the NFP data is released and the market reaction triggers one order, the trader can place a tight stop-loss order to limit losses if the market reverses after triggering the orders.

Trading before the NFP release is risky and is best suited for experienced traders with a high-risk tolerance and a deep understanding of short-term technical analysis.

The period after NFP release, usually 15 – 30 minutes after the job numbers are out, offers excellent opportunities for risk-averse traders to open positions. Forex traders now have adequate information on the NFP headline numbers and wage growth figures, making analyzing emerging trends in a currency pair’s movement easier.

Trading post-NFP release is less risky because traders avoid the initial NFP volatile price swings. For instance, EUR/USD traders who waited 15 minutes after the NFP numbers release of 3rd February 2023, which was overwhelmingly positive, received clear trend entries with almost no drawdown. The trend lasted for around a month and captured around 300 pips.

The breakout and retest strategy is the most popular post-NFP strategy. The breakout strategy involves traders identifying key support and resistance levels prior to the NFP release and then waiting for the price to move significantly above resistance or below support following the NFP announcement. Traders place trade entries on the retest of the broken support or resistance level.

Trading after the release of NFP is suitable for traders with a moderate to strict risk tolerance, including novice traders.

Yes, trading the NFP week is safe for traders who understand the volatility risk and have the appropriate risk management measures in place. The biggest threat to trading the NFP week is usually the high volatility, which leads to substantial losses if the actual NFP numbers significantly beat expectations.

Rapid price movements often lead to slippage, which means trades are executed at unfavorable positions. Brokers’ widespread use of this technique leads to higher trading costs.

Forex traders manage their trading positions during NFP week by using stop-loss orders to minimize potential losses. The traders also lower their leverage, which could amplify losses, and adjust their position sizes, ensuring they don’t risk more than 1 – 2% per trade.

Experienced traders navigate the NFP week by sticking to their trading plans and keeping up with economic calendars and real-time news feeds to stay aware of potential market-moving news. Sticking to a trading plan helps the trader avoid making impulsive decisions like overtrading due to FOMO (fear of missing out), which is common after NFP data releases.

Trading during NFP week is safer for new traders who practice their strategies on demo accounts first before opening a live account. Demo accounts provide traders with multiple examples of non-farm payroll’s impact on Forex, allowing them to get comfortable with the volatility.

An example of a non-farm payroll report in Forex is the NFP release of June 2020 during the COVID-19 pandemic. The expected headline number was +3,000k (meaning an addition of 3 million jobs to the economy), but the actual headline figure came to +4,800k (meaning 4.8 million jobs were added to the economy). The unemployment rate for the same period had fallen to 11.1% from 13.3%, and the hourly earnings fell by 1.2% compared to the previous month (month-over-month).

The positive, higher-than-expected headline number caused an initial bullish reaction on the U.S. dollar, but the reaction was short-lived due to concerns over the sustainability of the economic recovery amidst rising COVID-19 cases. EUR/USD experienced an initial bearish move before regaining strength as market participants portrayed mixed feelings over the strength of USD.

Positive NFP data that didn’t result in an outright bullish performance by the U.S. dollar shows that other economic factors influence investor perceptions of the US economy and impact Forex exchange rates.