Forex Trading Guide: The NFP Report (Nov)

Ahoy, forex mateys! The final NFP report before the Fed’s December 16 rate decision is looming over the horizon. What happened last time? What’s expected to happen? Get up to speed with my handy Forex Trading Guide for the NFP report.

Why is this report important?

The NFP report is inherently important because it gauges the overall health of the U.S. labor market. And a healthy labor market is important because it has a positive spillover effect on the entire U.S. economy: high employment and wages means higher consumer sentiment and spending, fueling demand for more goods and services, and making the economy grow.

However, this particular NFP report is even more important because it is the final NFP report before the U.S. Fed announces a rate hike (or not) on December 16. And rhetoric from Fed officials have been supportive of a rate hike. But they framed their optimism on continued economic developments, particularly in employment, so a really bad NFP report could destroy that optimism while a good one could help reinforce it.

What happened last time?

  • Non-farm payrolls: 271K vs. 185K expected, 137K previous
  • Jobless rate: downtick to 5.0% as expected, 5.1% previous
  • Average hourly earnings: 0.4% vs. 0.2% expected, 0.0% previous
  • Labor force participation rate: steady at 62.4%

October’s NFP report was pretty sweet (if you were bullish on the Greenback) since non-farm payrolls saw a net increase of 271K, which is significantly higher than the expected 185K increase, as well as the previous increase of 137K. It was even more of a surprise because the ADP report only registered a net increase of 182K, which is lower than the 190K reported previously.

Anyhow, the higher-than-expected reading for non-farm payrolls was enough to cause the jobless rate to tick lower to 5.0%. Also, the labor force participation rate held steady at 62.4%, so the downtick in the jobless rate was a healthy one. In addition, the average hourly earnings jumped by 0.4% after flattening out in the previous month, which was another great news for forex traders who were bullish on the Greenback.

Overall, October’s NFP report helped to cement expectations for a highly-anticipated December rate hike, pumping up demand for the Greenback and sending it higher across the board.

What do forex analysts expect?

  • Non-farm payrolls: 200K expected vs. 271K previous
  • Jobless rate: expected to hold steady at 5.0%
  • Average hourly earnings: 0.2% expected vs. 0.4% previous

For November’s employment situation, forex traders and economic analysts are expecting non-farm payrolls to increase by 200K, which is a bit lower than the previous 271K increase and the 12-month average of 239K. The jobless rate, meanwhile, is expected to hold steady at 5.0%. As for the average hourly earnings, it’s expected to increase by 0.2%, which is a slower increase when compared to the previous month’s 0.4%, but an increase is always good news.

Looking at some of the leading indicators, ISM’s manufacturing PMI for November unexpectedly dropped below the 50.0 neutral mark to 48.6 (50.1 previous), but the employment index jumped above 50.0 to 51.3 (47.6 previous). Markit’s manufacturing PMI for November also slid lower from 54.1 to 52.8, but it’s still above the 50.0 level. Still, it was less optimistic on payrolls since employment levels across the manufacturing sector only had a “limited” rise.

Do note however, that most of the recent job gains come from the services sector. In the previous NFP report, for example, services contributed a net increase of 241K jobs while the manufacturing sector didn’t contribute anything at all since it flattened out.

Anyhow, Markit’s preliminary services PMI for November jumped from 54.8 to 56.5, citing a “solid increase” in payroll numbers because “the rate of job creation picked up slightly since October,” as one of the reasons for the jump.

Overall, leading indicators are all pointing to an increase in non-farm payrolls. And Markit’s services PMI report is even hinting at a potential upside surprise.

How might the U.S. dollar react?

A higher-than-expected net increase in non-farm payrolls could convince forex traders, especially the interest rate junkies, to load up on the Greenback since it would further reinforce expectations of a rate hike when the December 16 Fed rate decision and FOMC statement finally comes around. The previous NFP report was a textbook example of such a scenario.

USD Index Forex Price Action 15-minute Chart

USD Index Forex Price Action 15-minute Chart

On the flip side, a lower-than-expected increase may cast doubts on the potential rate hike, and could potentially trigger a bearish forex reaction. Make sure to take a look at the jobless rate, the labor force participation rate, and the wage growth as well since they also help to define the Greenback’s direction, with a mixed reading resulting in the Greenback trading sideways or having limited gains (or losses).

Be careful, however, since the Greenback has been grinding ever higher since the previous NFP report, and with the December 16 rate decision fast approaching, some forex traders who have been betting on a rate hike may use the opportunity to exit from their positions by selling into a potential Greenback rally, assuming that the NFP report is gonna be positive overall, of course.

USD Index Forex Price Action 1-hour Chart

USD Index Forex Price Action 1-hour Chart

How do you think November’s NFP report might turn out? Got any trade plans in mind? Why not share what you think in the poll or comments section below.