http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2011/01/06/EURUSD_Trading_the_Change_in_U.S._Non-Farm_Payrolls.html
Trading the News: U.S. Non-Farm Payrolls
Why Is This Event Important:
Employment in the world’s largest economy is expected to increase for the third consecutive month in December, and the release could spark a bullish reaction in the U.S. dollar as the outlook for growth and inflation improves. However, there could be mixed reactions to the data as the holiday season typically boosts demands for temporary workers, and the ongoing weakness underlying the labor market could lead the Fed to expand monetary policy further over the coming months as it aims to encourage a sustainable recovery.
What’s Expected:
Time of release:01/07/2011 13:30 GMT, 8:30 EST
Primary Pair Impact :EURUSD
Expected: 150K
Previous: 39K
Will This Be Market Moving (Scenarios):
U.S. non-farm payrolls are forecasted to increase 150K in December after rising 39K in the previous month, while the annual rate of unemployment is projected to fall back to 9.7% after unexpectedly climbing to 9.8% in November. After losing more than eight million jobs during the recession, the anticipated rise in U.S. employment may fail to encourage an improved outlook for the economy as the current pace of economic growth remains “insufficient to bring down unemployment,” and the Fed may see scope to conduct additional monetary easing in 2011 as the fundamental outlook remains clouded with uncertainties.
The Upside
As private payrolls expand at a record pace in December, with businesses increasing their rate of production, the labor market should improve going forward as the economic recovery gradually gathers pace. In turn, a marked rise in employment could lead the EUR/USD to extend the decline from earlier this week, and the exchange rate may pare the advance from back in September as the recovery in the U.S. outpaces the rebound in Europe.
The Downside
However, as the Fed casts doubts for a sustainable recovery, businesses may keep a lid on employment given the substantial margin of slack within the real economy, and speculation for additional monetary easing may intensify over the coming months as the central bank maintains a dovish bias for future policy. Accordingly, a dismal NFP report could lead the greenback to pare the advance from earlier this week, and the EUR/USD may work its way back above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as growth prospects deteriorate.
How To Trade This Event Risk
Projections for a third consecutive rise in employment certainly favors a bullish outlook for the greenback, and price action following the release could set the stage for a long U.S. dollar trade as the prospects for future growth improves. Therefore, if non-farm payrolls increase 150K or greater in December, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.
On the other hand, the ongoing slack within the real economy paired with the cautious tone held by the central bank could bear down on business sentiment, and firms may curb their willingness to expand their labor force as the economic outlook remains clouded with uncertainties. As a result, if NFP’s rise less than 50K or unexpectedly contract from the previous, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.
Potential Price Targets For The Release
Impact that U.S. Non-Farm Payrolls has had on USD during the last month
| Period | Data Released | Estimate | Actual | Pips Change (1 Hour post event ) | Pips Change (End of Day post event) |
| Nov 2010 | 12/03/2010 13:30 GMT | 150K | 39K | +98 | +155 |
November 2010 U.S. Non-Farm Payrolls
| Employment in the world’s largest economy increased 39K in November amid forecasts for a 150K expansion, while the jobless rate unexpectedly widened to 9.8% from 9.6% in the month prior as discouraged workers returned to the labor force. A deeper look at the report showed private payrolls increased 50K during the month, which fell short of expectations for a 160K rise, while jobs in manufacturing unexpectedly slipped another 13K after contracting 11K in October. As the Federal Reserve conducts an additional $600B in quantitative easing, the unprecedented efforts taken on by the central bank should help to stimulate the ailing economy, and the recovery should gradually gather pace going forward as policy makers continue to support the real economy. However, the Fed is likely to maintain a cautious tone going into 2011 as the economic outlook remains clouded with high uncertainty, and the central bank may take additional steps to stem the downside risks for growth and inflation as it aims to encourage a sustainable recovery. |  |
What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
| Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release. | Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release. |
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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com
DailyFX provides forex news on the economic reports and political events that influence the currency market.
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