The employment rate is a number of people who have jobs expressed as a percentage of the total workforce. It is the third important indicator for foreign currency markets. Like GDP, the employment rate of population capable of working mirrors an economic environment of a country and its health. Every country sets its threshold of the unemployment rate. Therefore, it is faulty to compare the same unemployment indicators of any two counties. So, economists are focused on a more important aspect, to be exact, how employment statistics change in the course of time in a particular country. Let’s consider, for example, the United States.
Nonfarm payroll (NFP) is an indicator which is a driving force of the market. As a rule, it makes a strong impact on trading. Monitoring of exchange rates proves that the forex market reveals short-term changes before and after a nonfarm payroll publication. Therefore, this indicator is high priority when analyzing the forex market. Let’s get an insight into this employment indicator.
A nonfarm payroll is reported monthly by the US Bureau of Labor Statistics. The data is released on the first Friday of the month at 8:30 EST.
What does nonfarm payroll mean?
This indicator represents a total number of paid US workers of any business excluding the following employees:
- Farm employees;
- Private household employees;
- Employees of nonprofit organizations;
- Government employees.
The indicator accounts for approximately 80% of employed American nationals. It is used by the US Federal Reserve and government policy makers to judge the current and future state of the economy. Resting on the nonfarm payroll, officials determine both domestic and foreign monetary policy.
Importance of nonfarm payroll
The nonfarm payroll shows how many jobs appear on the US labor market. When more vacancies are added, it means that newly employed people have money to spend on goods and services. Therefore, higher spending bolsters economic growth. For this reason, the nonfarm payroll is considered to be the key leading economic indicator.
As a rule, US GDP growth makes a positive impact on the US dollar exchange rate against other global currencies. Besides, the boosting American economy could affect other economies in a benign way. As a result, recovery will trigger an interest rates hike in the US. All these factors make the US dollar more beneficial on the global market. It means the greenback will go on reinforcing against other global currencies.
How NFP influences trading on Forex
The nonfarm payroll statistics is used in fundamental analysis. A scale of the report’s impact on Forex has a direct correlation between actual data and expectations of Forex strategists. If the actual print exceeds expectations, it will make a positive impact on the US dollar. Alternatively, when this indicator falls short of expectations, the American currency will be under pressure.
Ahead of a nonfarm payroll release, financial markets are usually marked by volatility. According to Forex insiders, only skilled market participants can handle trading in such a difficult period. They have already gone through a turbulent market, hence they are able to react instantly to a new data. Inexperienced traders had better close positions until the nonfarm payroll report is published.
Essential to know:
- The nonfarm payroll is the key barometer of the labor market. The farming industry is not taken into account because employment in agriculture depends on a season. So in winter farms hire fewer employees than in spring or summer.
- Similar reports are published in Australia, Switzerland, Canada, and Germany. However, Forex is especially sensitive to nonfarm payrolls in the United States.
