Trading Guide: May 2013 Non-Farm Payrolls

With the recent news that the Fed is ready to taper off its open-ended quantitative easing program if economic data continues to impress, the results of the U.S. labor report that will be released tomorrow will likely play a key role in determining where the Fed‘s monetary policy, and consequently, the Greenback, is headed.

The upcoming U.S. labor report is expected to show that the pace of hiring remained mostly the same last May. It’s projected to show that 167,000 jobs were created for the month, just slightly higher than the 165,000 increase we saw in April. As for the unemployment rate, it’s anticipated to have held steady at 7.5%.

Given the mixed employment-related data for May, it’s hard to predict what the jobs report will show. On the positive side, for instance, a consumer survey reported that workers are more upbeat about the labor market, citing that work is “plentiful”. The report also showed that less people are saying that jobs are “hard to get.”

In addition, initial jobless claims, despite its volatility, have been generally moving lower over the last couple of weeks. To be more specific, during the first week of May, it was at 360,000. On the second week, it fell to 340,000. It climbed slightly last week to 354,000 but is expected to fall again to 345,000.

On the negative side, the ISM Manufacturing PMI greatly missed forecast. Instead of printing a reading of 50.6, it fell to 49.0. It was also significantly lower compared to the previous month’s reading of 50.7. Moreover, the ADP Employment Change released yesterday also disappointed. It revealed that only 135,000 jobs were added, considerably less than the 171,000 increase market participants had initially forecasted.

GBP/USD and EUR/USD 15-minute Charts

As we can see from both the EUR/USD and GBP/USD charts, the dollar rallied hard upon the initial release, with the two pairs falling about 100 and 60 pips respectively. However, the Greenback rally quickly lost steam, as it gave back all its gains over the next couple of hours.

What this signals to us is that we must be careful with directional plays. No matter what the result of the employment report, we could see the exact same thing play out this Friday. Keep in mind that as we enter the summer holidays, volume dries up quickly so more often than not, we don’t see sustained moves.

That said, one way to potentially play this week’s NFP report is to fade the initial move. After price shoots off in one direction, you can wait until it tests previous areas of interest or at psychological round figures. If it appears to be holding, you can fade the move.

Always remember though, that you should always keep your stop losses in check, just in case price does continue in the direction of the initial move. You don’t wanna get burned before you hit the weekend now do you?