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The non-farm payrolls (NFP) report is usually one of THE major market movers for the Greenback, so gear up because it’s time for another edition of my Forex Trading Guide.

Since the U.S. markets will be closed on Friday, keep in mind that the U.S. jobs report will be released on Thursday 12:30 pm GMT.

What is this report all about?

This report provides a snapshot of the overall health of the labor market in all sectors, with the exception of the farming sector, the general government, some non-profit organizations, and private household employees.

Forex traders usually focus on the employment change (the number of jobs created or lost) during the reporting period, the jobless rate, and the average hourly earnings.

The NFP report is very important because a healthy labor market usually leads to higher consumer confidence and consumer spending. An increase in consumer spending means more demand, which means higher prices down the road (i.e. inflation).

Rising inflation levels generally lead to high-interest rates and currency appreciation. Aside from that, companies will need to increase production and hiring in order to meet demand, causing the economy to expand further.

What happened last time?

The previous non-farm employment change report was significantly better-than-expected at 280K new jobs (222k expected, 221K previous) created for the May reporting period.

Average hourly earnings also beat market expectations by posting a 0.3% increase (0.25 expected, 0.1% previous).

The only downer was the jobless rate since it ticked higher to 5.5% (5.4% previous). The U.S. Bureau of Labor Statistics (BLS) tried to play it off by claiming that the jobless rate is “essentially unchanged.”

Surprisingly, I tend to agree with the BLS since the jobless rate has been fluctuating around the 5.5% level since December 2014.

Also, the civilian labor force rose by 397,000 and the labor force participation rate actually ticked higher to 62.9% (62.8% previous), which means that more Americans are actively resuming their job hunt.

It is also worth noting that the NFP report echoed the upbeat employment change estimate provided by Automatic Data Processing, Inc. (ADP) since the latter also showed a significant disparity between the actual (201K) and previous (165K) readings.

USD/JPY 1-hour Forex Chart
USD/JPY 1-hour Forex Chart

Oh, for newbie forex traders out there, the ADP report is used as a leading indicator for the NFP report because ADP is a major payroll services provider to over 620,000 businesses, including multinational corporations.

What is expected by most forex traders?

The general consensus among forex traders is that non-farm employment change will be much lower in June, with only 227K new jobs for the reporting period.

The average hourly earnings, meanwhile, could post 0.2% growth, slightly slower than the previous increase of 0.3%. On a more upbeat note, the jobless rate is expected to tick downwards from 5.5% to 5.4%.

This lines up with Markit’s manufacturing (53.4 actual v.s. 54.0 previous) and services (53.4 actual v.s. 54.0 previous) PMI readings for June since both indicators show a slight slowdown, although they’re both still above 50 which indicates industry expansion.

In contrast, the University of Michigan’s consumer confidence index for June climbed to 96.1 (94.6 previous) due to improving labor conditions, so perhaps the actual reading may still show an improvement.

Curiously, the NFP and ADP reports are at odds with each other since the ADP report is expected to show further improvement, with 216K new jobs for the reporting period (201K previous).

How could the Greenback react?

It’s hard to tell. While the ADP report usually acts as a leading indicator for the NFP report, the two reports are often at odds with each other.

Nonetheless, forex traders should keep a close eye on the actual readings for both the ADP and NFP reports relative to their respective previous readings.

If the actual reading for the ADP report meets or beats expectations and the NFP report posts an improvement over the previous read, then forex traders can expect the Greenback to find some buyers.

But if the actual reading for the NFP report shows much weaker jobs growth, then there is a very good chance that the Greenback would not climb as much or perhaps even decline.

Aside from the headline NFP reading, many forex traders may also react to stronger or weaker average earnings data.

Also, we have a lot of other factors weighing in on the markets. For one, there seems to be a prevailing risk-off sentiment due to the Greek crisis, so perhaps we will see some demand for the safe-haven Greenback regardless of the actual readings for NFP.

Bear in mind that we’re also in the middle of a shortened forex trading week before U.S. traders take off for their Fourth of July long weekend, which suggests the possibility of profit-taking and short-term reversals around the end of the New York session.

How do you think the NFP report will turn out? Don’t be shy! Show how awesome you are by sharing your thoughts in our comments section below!