From The Free Forex Encyclopedia
The Employment Situation Report is released on a monthly basis. It includes a basket of employment reports such as the Unemployment rate, Average Hourly Earnings, and the Non Farm Payrolls report. The Non Farm Payrolls report is arguably one of biggest market movers in the Forex. If you are looking for a report that creates a lot of volatility then this is the one for you!
What exactly is the Non Farm Payrolls report? What does it measure?
Formal answer: The Non Farm Payrolls report, or NFP for short, is actually part of the Employment Situation report which also includes the Unemployment Rate, Average Hourly Earnings, and Average Workweek Hours. The NFP seems to get the most attention because it measures the actual number of paid employees (full and part time) in the business and government establishments.
BabyPips answer: The NFP basically tells us whether the labor market is shrinking or expanding. In other words, it will let me know how good my chances are of getting hired as a male model for SuperHot Modeling Agency, Inc. If the NFP has been growing then it means the labor market is hot, and my chances of getting hired are good. However, if the NFP has been declining then my chances of being a male model are not good and my dreams of walking down that runway would probably be shattered. Of course it could also be my ugly exterior thats holding me back....NAH!
So why does this report tend to move the market so much?
Formal answer: The NFP along with the other reports included in the Employment Situation give traders a way to gauge the future direction of the economy.
BabyPips answer: Everyone watches this report closely. Because everyone watches it closely, it moves violently no matter what the report actually says. However, since the Employment Situation covers everything from the number of workers to how much they're making, it makes this report a powerful tool for "guessing" where the economy is headed. For example:
If the labor market is growing, that means more people are making money. The more people that make money, the more spending there will be. More spending results in a higher GDP, and GDP my friend, is the broadest measure of the economy.
Ok so how does the Employment Situation report affect the Dollar?
Basically if the Employment Situation is positive (growing NFP, lower unemployment rate) then it's also positive for the Dollar. On the other hand if the Employment Situation is negative (decreasing NFP, higher unemployment rate) then it's also negative for the Dollar.
This report sounds like a lot of fun to watch. When does it come out?
The Employment Situation report comes out on the first Friday of every month.
Additional Resources for the NFP: