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Heads up! Another set of fireworks could be coming your way when the U.S. releases its employment report on Friday.

After all, the U.S. jobs market is expected to get back on its feet after hitting a “soft patch” in May.

For that month, the non-farm payrolls report posted a disappointing 54,000 increase in hiring then, much less than the expected 161,000 figure.

This time around, the NFP report could print an estimated 87,000 increase in employment for June. Recall that the bleak jobs figure in the earlier month was blamed on the supply chain disruptions caused by the earthquake in Japan.

At that time, slower production in Japan forced U.S. manufacturers, particularly those in the automobile industry, to lay off workers.

Now that Japan’s industrial production seems to be back on its feet with a 5.7% month-over-month rebound, the damage to the U.S. economy may have been erased. With that, a positive spillover on the U.S. jobs market could take place as automakers hire back more workers.

Still, the unemployment rate is expected to stay unchanged at 9.1%. In fact, the U.S. would need an additional 200,000 jobs in order to bring their jobless rate down a notch to 9.0%. That sounds highly unlikely but I’d like to be prepared with a game plan in any case…

How to trade the NFP

If the NFP manages to beat forecasts, then EUR/USD’s price action could mimic the release on May 6.

The NFP came in with a 244,000 gain, significantly higher than the 185,000 increase initially expected. As a result, EUR/USD experienced a huge 200-pip drop in a span of six hours.

EUR/USD May 6 Chart

On the other hand, in the event of a weak NFP, then we could expect a reaction similar to last month’s release.

The NFP report showed a 54,000 figure, which was roughly just a third of the forecast. A look at EUR/USD’s chart will show that the price rose by 175 pips over a four-hour period.

EUR/USD June 3 Chart

Looking at the previous two releases, we can conclude that price action had a POSITIVE CORRELATION with results – a better-than-expected result lead to a dollar rally, while a worse-than-expected figure was followed by a sell-off.

One important thing you should also take note of when trading the NFP report is the way the price actually moves right after the release.

Typically, EUR/USD fakes one direction first THEN reverses and rallies in the opposite direction.

In the last two releases, this is exactly what happened.

All right, there you have it, folks! Hopefully, this quick guide can assist you in trading the upcoming NFP report and help you bag some pips!