Any experienced forex trader will agree that the Nonfarm Payroll, or “NFP” data is the most closely watched economic indicator that can have a profound effect on the forex market. Depending on how risk averse a forex trader is, he will either choose to trade during this data release or stay out of the market completely.

When the Nonfarm Payroll numbers are released, it’s not uncommon to see the forex market react with extreme volatility, especially when the numbers are beyond consensus expectations. Wild swings in currency rates can occur, creating a high risk / high reward trading environment that lasts only for a short period of time, sometimes in just minutes.

What is the NFP?

The NFP data is released by the Bureau of Labor Statistics of the U.S. Department of Labor, usually on the first Friday of the month at 8:30 a.m. EST. The data reflects the number of manufacturing, construction, and goods-producing jobs that were added or lost in the U.S. economy during the previous month. It does not include any farm-related jobs (hence, “nonfarm”) because agricultural sector jobs data can be distorted due to seasonal hiring.

Basically, the NFP data measures the growth or decline of the U.S. work force. Growth means more workers making money and spending money. Decline means less workers making money and spending money. I’d say this is a pretty important influence on the economy!

Why the NFP Moves the Forex Market

So what’s the big deal with the NFP? Why does it create such a stir in the forex market? It’s because the NFP is a strong indicator of the general well-being of the economy.

If the NFP signals growth in the U.S. labor force, that means more people are working, which means more people are spending, which means more revenue for companies, which means more jobs will be created, which leads to more spending, and so on. It all translates to potential economic growth, which is very bullish for the U.S. Dollar.

However, too much growth too quickly can lead to inflation, which the Fed may need to address by raising interest rates. A rise in interest rates would also be bullish for the U.S. Dollar.

These underlying factors create a very strong direct correlation between NFP numbers and U.S. Dollar (USD) currency movement. When the NFP numbers are positive, it’s bullish for the USD. When NFP numbers are negative, it’s bearish for the USD.

If the NFP data is drastically beyond consensus expectations, the forex market can experience wild swings in the major currencies. A large amount of pips can be made (or lost) in a matter of minutes.

To Trade or Not To Trade the NFP?

Every Forex trader is different. If a trader is risk averse, he will choose to close all his open positions and stay out of the forex market when the NFP data is released.

However, some traders who are tempted to capture a large gain in a short amount of time will try to trade the NFP data release, despite the risk. They will attempt to minimize the risk by using trading strategies such as a straddle. This type of strategy is designed to profit from extreme currency movement, regardless of market direction.

If you are considering trading the NFP data release, be very careful. High volatility in the market usually leads to a high amount of slippage from your forex broker. This can spell disaster if your order is filled at a rate many pips away from your original order rate.

Ultimately, trading the Nonfarm Payroll data release is up to you. Just make sure the rewards are enough to justify the risks associated with trading in such a volatile market environment.

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