Effect of NFP on Forex

The non-farm payroll (NFP) figure is a leading economic indicator for the United States economy. This data represents the number of additions to the workforce, excluding agricultural employees, government employees, private domestic workers and employees of non-profit organizations. Among traders, NFP is also often referred to simply as payroll. Although more often referred to as NFP.

Effect of NFP on Forex

NFP data is released monthly by the Bureau of Labor Statistics. This data release is eagerly awaited by all market participants. This report makes it an excellent indicator of the current state of the economy. The next data release can be found in the economic calendar.

The employment sector is a very important indicator for the Federal Reserve Bank. When unemployment is high, policymakers tend to have an expansionary (stimulative) monetary policy, with low interest rates. The aim of expansionary monetary policy is to increase economic output and increase employment.

So, when the unemployment rate is higher than usual, the economy is expected to be running below its potential and policymakers will try to stimulate it. Stimulating monetary policy requires lower interest rates and reduces the demand for Dollars (money flows out of low-yielding currencies). To learn exactly how it works, keep reading this article on how interest rates affect forex.

Traders should be wary of data releases such as NFPs. Even currently open positions may be terminated due to a sudden increase in volatility. When volatility increases, spreads also increase, and increased spreads can lead to margin calls.

Trading On NFP Data Release: Important Tips

Here are some tips to keep in mind when using non-farm payroll data to initiate forex trader transactions:

  1. NFP data is released on the first Friday of each month.
  2. The release of NFP data is accompanied by increased volatility and widening spreads.
  3. Currency pairs that are not linked to the US Dollar may also experience increased volatility and widening of the spread.
  4. Trading on NFP data releases can be dangerous due to increased volatility and possible widening of the spread. To overcome this, and to avoid forcibly closing traders' positions, it is highly recommended to use appropriate leverage, or no leverage at all.

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