Although it may feel like some kind of computer game at times, it should be no surprise that the forex market is driven by events that take place in the real world. To be more precise, we are mostly talking about economic data releases from various countries, with the United States being the most important simply because it is the world’s largest economy and due to the dominant role the US dollar plays in the global forex market.
A problem new traders often face is that they try to stay up to date on all the economic news that is being reported, but with the 20-hour news cycle that we have in forex, they are unable to separate the important news from the less important, and end up getting overwhelmed.
As we have talked about on this blog before, traders who follow any kind of trading strategy based on technical analysis may be wise to stay away from the market during important data releases. The frustrating part then is that for currencies like the US dollar, these data releases seem to come out pretty much all the time! The question then becomes, what should we do?
The solution is to narrow down the number of currencies you focus on and which news you pay attention to. Here, we will talk about what is probably the most important among all data releases: The US Non-farm Payrolls (NFP). If you keep an eye on this number only, you are already in a much better position to understand why currency pairs move the way they do. Other than this number, interest rate statements are probably the only events that even come close in terms of their influence on the forex market.
What is Non-farm Payrolls?
The NFP number is released on the first Friday of each month, and measures how many new jobs have been created in all areas of the economy except for government jobs, private households, non-profit organizations, and farming. It is perhaps the most important indicator of how the US economy is performing.
Simply put, if the economic outlook is good, companies tend to hire more people. If they are pessimistic about the future, they will hire fewer people. All of this insight is presented as a single number on the first Friday of each month.
In general, a higher than expected NFP number will lead to a stronger US dollar compared to other currencies. Likewise, a lower than expected NFP tends to be followed by a sell-off in the US dollar.
However, this simple logic tends to become a bit more complicated when the number that comes out surprises traders in a big way. On these occasions, you may see price movements that don’t necessarily make sense at first. During those times, remember the old saying among forex traders that you “don’t trade the news, but how people interpret the news.”
Enjoy your summer and trade safely in August!