How to Trade GBP/USD This NFP Friday

With everyone focused on the U.S. Fiscal Cliff and euro zone bond yields, it’s easy to forget that the last nonfarm payrolls (NFP) release of 2012 is only a few hours away!

For the forex newbies out there, the NFP report is simply an estimate of the change in employment in the business and government sectors not related to the farming industry. The report is usually closely watched as it can give clues on the future economic activity in the U.S.

This time around market junkies are expecting the unemployment rate to remain steady at 7.9%. Interestingly though, they’re only forecasting a net increase of 90,000 employees in November, a sharp drop from the 171,000 increase that we saw in October. This is somewhat surprising since payroll figures usually stabilize and even inch higher ahead of the December holidays.

But I can’t blame my forex buddies for expecting a weak reading. For one thing, the impact of Hurricane Sandy is expected to have carried over to November’s hiring activities. In fact, the ADP report published yesterday already came in worse than expected at 118,000. Say what you will about the accuracy of the ADP numbers, but I think that it does a pretty decent job at predicting the direction of employment numbers.

Still, estimates are just predictions. With the actual NFP reading missing its forecasts 9 times in the last 11 releases, you can understand why volatility-loving traders are at the edge of their seats. If you’re one of them adrenaline junkies and are planning on trading Cable at the release, here are a couple of scenarios you can consider:

Scenario 1: NFP comes in stronger than expected

GBP/USD

We don’t need to look far for an example. Just last month the NFP trampled expectations of a 123,000 increase by coming in at 171,000. As a result, appetite for the dollar shot up, enough for GBP/USD to break its intraday support and drop by 50 pips. The pair eventually closed 113 pips lower than its open price.

Scenario 2: NFP release meets forecast

GBP/USD

Back in October, the NFP report actually came in to a T, printing an increase of 114,000. This initially sent GBP/USD trading higher, but by the end of the day, the pair was trading lower, as it dropped late in the New York session. The pair eventually broke for new lows and settled around 1.6130, down over 80 pips from its highs on the day.

Scenario 3: NFP fails to hit estimates

GBP/USD

Lastly, let’s take a look at an example when the report disappoints the markets. Last September, the NFP report showed a figure of 96,000, which missed the forecast of a 123,000 increase. This led to a strong dollar sell-off, allowing GBP/USD to rally over 100 pips higher from its Tokyo low!

Tips and Tricks

Based on the last three releases, GBP/USD gives us a lot of action when trading on NFP Friday. We also know that it tends to have a positive correlation with the dollar. That is, a better-than-expected reading inspires a dollar rally while a weak reading boosts the pound.

Still, there’s no such thing as a sure thing when it comes to the markets! The tips above just help might help you increase your odds at success, but you also have to do your own diligence! Read up, explore other possible scenarios, and make sure that you have a solid trading plan ready!

Good luck!