Trading the News: U.S. Non-Farm Payrolls

What's Expected:

Time of release: 11/04/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 95K

Previous: 103K

DailyFX Forecast: 60K to 110K

Why Is This Event Important:

U.S. Non-Farm Payrolls are projected to increase another 95K in October after expanding 103K in the previous month, and a positive employment report may spur a bullish reaction in the greenback as it highlights an improved outlook for the world's largest economy. As the recovery gradually gathers pace, we may see the Fed soften its dovish tone for monetary policy, and the central bank may bring its easing cycle to an end as the region skirts a double-dip recession.

However, as the economy remains far from recouping the 8+ million jobs lost during the recession, we may see the FOMC keep the door open to expand its balance sheet further, and the central bank may carry its easing cycle into the following year in an effort to encourage a sustainable recovery. Nevertheless, market participants may overlook the fundamental implications of the employment report as risk trends continue to dictate price action in the currency market, and a rise in market sentiment may dampen demands for the greenback as investors increase their appetite for yields.

Recent Economic Developments

The Upside

Release

Expected

Actual

ISM Non-Manufacturing (Employment) (OCT)

--

53.3

ADP Employment Change (OCT)

100K

110K

ISM Manufacturing (Employment (OCT)

--

53.5

The Downside

Release

Expected

Actual

Consumer Confidence (OCT)

46.0

39.8

Producer Price Index (YoY) (SEP)

6.4%

6.9%

Consumer Credit (AUG)

$8.000B

-$9.501B

As the recent batch of data coming out of the world's largest economy reinforce an positive outlook for NFPs, we should see at least 95K rise in payrolls, but an above-forecast print may lead the EUR/USD to give back the advance from earlier this week as the data increases the prospects for a stronger recovery. However, businesses may scale back on hiring as they cope with high input costs paired with tight credit, and a dismal employment report is likely to weigh on the exchange rate as it dampens the outlook for future growth. In turn, we may see the EUR/USD extend the rebound from 1.3145, and the pair may retrace the sharp decline from 1.4246 as the fundamental outlook for the U.S. deteriorates.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Non-Farm_Payrolls_Report_body_ScreenShot062.png,

How To Trade This Event Risk

The slower pace of job growth may instill a bearish outlook for the greenback, but a positive NFP print could pave the way for a long U.S. dollar trade as it encourages expectations for a faster recovery. Therefore, if employment increases by more than 95K in October, we will need to see a red, five-minute candle following the release to establish a short entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, 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 cost once the first trade reaches its mark in an effort to protect our profits.

On the other hand, higher prices paired with the ongoing weakness within the real economy may lead businesses to keep a lid on employment, and the FOMC may see an increased argument to expand monetary policy further as the region faces a growing risk of a double-dip recession. As a result, if NFPs miss market expectations, we will implement the same setup for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the U.S. Non-Farm Payrolls report 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)

SEP 2011

10/07/2011 12:30 GMT

60K

103K

+28

-53

September 2011 U.S. Non-Farm Payrolls

Employment in the world's largest economy increased 103K in September after expanding 57K during the previous month, while the jobless rate held steady at 9.1% for the third consecutive month. However, the breakdown of the report showed a 13K drop in manufacturing jobs, which was followed by a 34K decline in public sector employment, while private payrolls increased 137K during the same period after rising 42K in August. As job growth picks up, the Fed may strike an improved outlook for the region, but we would need to see a large pick up in employment to recoup the 8+ million jobs lost during the recession. In turn, the Fed may take additional steps to stimulate the ailing economy, and the central bank may carry its easing cycle into the following year in order to promote a sustainable recovery. The above-forecast NFP print prop up risk sentiment, which pushed the EUR/USD above 1.3500, but the greenback gain ground during the North American trade as the exchange rate settled at 1.3391 at the end of the day.

EURUSD_Trading_the_U.S._Non-Farm_Payrolls_Report_body_ScreenShot061.png,

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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