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

What's Expected:

Time of release: 02/03/2012 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 145K

Previous: 200K

DailyFX Forecast:135K to 160K

Why Is This Event Important:

Employment in the world's largest economy is expected to increase another 145K in January, and the ongoing improvement in the labor market may prop up the U.S. dollar as the data dampens the scope for another round of quantitative easing. As the economic recovery gathers pace, we should see the Federal Reserve continue to soften its dovish tone for monetary policy, and the central bank may endorse a wait-and-see approach throughout 2012 as the risk of a double-dip recession subsides. However, as Fed Chairman Ben Bernanke continues to highlight the ongoing slack within the real economy, the central bank head may keep the door open to expand the balance sheet further, and increased speculation for QE3 will dampen the appeal of the reserve currency as the highly accommodative policy encourages risk-taking behavior.

Recent Economic Developments

The Upside

Release

Expected

Actual

Durable Goods Orders (DEC)

2.0%

3.0%

NFIB Small Business Optimism (DEC)

93.8

93.8

Consumer Credit (NOV)

$7.000B

$20.374B

The Downside

Release

Expected

Actual

ISM Manufacturing - Employment (JAN)

--

54.3

ADP Employment Change (JAN)

182K

170K

Consumer Confidence (JAN)

68.0

61.1

Increased demands for U.S. goods paired with the rise in business sentiment certainly bodes well for the labor market, and a marked rise in hiring could lead the EUR/USD to work its way back towards the 20-Day SMA (1.2912) as market participants scale back bets for a large-scale asset purchase scheme. However, we may see a slowdown in hiring amid the ongoing slack within the private sector, and the FOMC may preserve a cautious outlook for the region as the fundamental outlook remains clouded with high uncertainty. In turn, a dismal NFP report could spark another short-term rally in the EUR/USD, and we may see the exchange rate work its way back towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants raise bets for QE3.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Non-Farm_Payrolls_Report_body_ScreenShot080.png,

How To Trade This Event Risk

As U.S. policy makers strive to strengthen the labor market, a positive employment report is likely to dampen expectations for additional monetary support, and the development could pave the way for a long U.S. dollar trade as the fundamental outlook for the world's largest economy improves. Therefore, if NFPs increase 145K or greater in January, we will need a red, five-minute candle following the release to establish a sell position 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 target. The second objective 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.

In contrast, the slowdown in private sector consumption paired with weakening outlook for global growth may lead business to scale back on hiring, and a dismal employment report could strengthen the case for QE3 as the central bank aims to encourage a sustainable recovery. As a result, if NFPs miss market expectations, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

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)

DEC 2011

01/06/2012 13:30 GMT

155K

200K

-35

-55

December 2011 U.S. Non-Farm Payrolls

EURUSD_Trading_the_U.S._Non-Farm_Payrolls_Report_body_ScreenShot079.png,

The U.S. Non-Farm Payrolls report showed a 200K rise in employment following the 100K expansion in November, while the jobless rate unexpectedly slipped to 8.5% from a revised 8.7% as discouraged workers continue to leave the labor force. The breakdown of the report showed a 212K rise in private payrolls, with manufacturing jobs advancing 23K, while public sector employment weakened another 12K during the same period after contracting 20K in the previous month. Indeed, the more robust recovery in the labor market will dampen the Fed's scope to push through another large-scale asset purchase program, and we may see the FOMC preserve a wait-and-see approach in 2012 as policy makers see the economic recovery gradually gathering pace over the coming months. Indeed, the better-than-expected employment report propped up the greenback, with the EUR/USD slipping below 1.2700, but we saw the pair consolidate going into the end of the week as the exchange rate settled at 1.2714.

--- Written by David Song, Currency Analyst

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