Will the NFP add colour to the global picture?

Non Farm Payrolls (NFP) is crawling back into the limelight as it is considered the most important and influential economic report for the currency markets.  The latest data will be released on Friday 8 July at 12:30GMT by the US Bureau of Labor Statistics. Why is the NFP report so significant? It is because it expresses the number of paid jobs added or lost in the US economy, excluding the farming industry.

Definition

NFP data is highly significant as it provides insights into the US labour sector. The employment sector is traditionally considered a sensitive topic as it reflects the health of the US economy. More people employed indicates more economic activity, more demand for goods and services and thus an expanding economy. Increased economic activity is an indication that the world's largest economy is growing. Confidence in hiring and growth has a significant impact on consumer spending, which is the main driver of the US economy supporting sectors such as housing, manufacturing and retail sales.

The Fed's tone

As the 600 billion dollar quantitative easing program ended in June as scheduled, the question now is whether the Fed is ready to start normalising its monetary policy. The Fed appears to be changing its tone recently and policymakers raised their inflation forecast, signalling that inflation pressures are gradually growing. Even though the Fed also lowered its economic growth forecast it acknowledges that the slowdown is temporary and economists expect growth to improve in the second half of the year. Also, Fed Chairman Ben Bernanke gave no sign of additional easing during his press conference recently. Will Friday's NFP be the sign the Fed needs before the beginning of a new monetary policy phase?

The market

The Labor Department's Bureau of Labor Statistics revealed a lower than expected figure of 54,000 new jobs in May. The unemployment rate remained unchanged at 9.1 percent. This time, investors are expecting the June data to show the creation of 90,000 new jobs and the unemployment rate to remain unchanged at 9.1%.

The plan

In the case of a significantly higher NFP number, the dollar may find support as it may be perceived as an indication of growth and a need for monetary tightening. Also, precious metals are expected to fall as a heightened risk appetite may decrease demand for safe haven bets. If the NFP shows a lower but close to expectations number, then we might witness a fall in the dollar as this may indicate that interest rates will remain at ultra low levels for an extended period of time. In the scenario where significantly poor NFP figures are revealed we expect the dollar and commodities to strengthen as risk aversion will spur demand for the safe haven dollar and precious metals.

Prepare to trade the most important indicator of the month and the exciting volatility that can lead to large price swings in currency pairs. Will we witness the start of a new trend? We will have to wait and see as it is an excellent time to trade the currency and commodity markets. Enjoy trading and good luck!!!

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