Understanding US Non Farm Payrolls In Regards To Forex Trading
Many who are concerned with forex trading that don’t understand the significance of the US Non-Farm Payroll report to the global financial markets . I often get the question , " why does the US jobs number each month cause the market to bounce up and down after it has been released ?" To answer that question it is important to look at what is represented by the US jobs number . This gives insight into why nothing else can make the markets move in this way.
The US Non-Farm payroll report is released on the first Friday of every new month . It is released by the US Bureau of Labor and Statistics or (BLS) and what it quantitatively measures , is the number of brand new jobs, excluding farming, created by the economy in the US the previous month. It is of such importance because it reflects the overall health of the US economy and thus the global economy . After all , in the world, the US economy happens to be the largest and the single largest component that drives the US economy is consumer spending ; this actually totals at least 70% ! This means, in forex trading, because a country’s interest rates is the number one factor affecting the strength or weakness of its currency , you must look at the rates and what is driving them; or the US Federal Reserve’s interest rate policy . Probably the most important data for the Fed to use is this job report to set short term interest rates and because of this, this report can and usually does , can lead to market volatility.
Why does this report have anything to do with the short term interest rates set by the Federal Reserve? A wonderful question! If the jobs report comes out strong this means that many people have jobs and there is high resource utilization. This also means that companies are employing workers and the consumers, or workers, are then spending money by shopping, dining out, or on clothing, and all of these things drive the economy ; they grow the economy or heat up the economy . When the economy is growing, this means that there is more money circulating and it is important for the Federal Reserve to keep inflation in check . They can keep inflation in check and lower inflation by raising the short term interest rates, which cools the economy down , or they heat up the economy by lowering the short term rates to help raise inflation . As you can see , so the job number is a huge factor , driving all of this beneath the surface .
The next time you are trying to prepare for a forex trading day or the next week , remember to take a look at the events calendar for the fundamental information that is scheduled to be released that upcoming day or week . If it’s the first week within a month then on the Friday of that first week you’ll have the Non-Farm Payroll report coming out since that’s always when it’s released . If you’re planning to take advantage of market volatility that occurs when this jobs report is released, simply keep the following formula in mind : If the jobs numbers are stronger than expected this usually means a stronger economy which will lead to a strengthening of the currency because short term interest rates go higher. Oppositely, if the jobs report comes out weaker than expected then this usually means lower short term interest rates that lead to currency weakness . It doesn’t always happen this cut and dried, but you can have a leg up on competitors with knowledge of these general parameters .