FX - EUR/USD: Trading the U.S. Non-Farm Payrolls Report

Trading the News: U.S. Non-Farm Payrolls

What’s Expected:

Time of release: 04/01/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 190K

Previous: 192K

DailyFX Forecast: 190K to 250K

Why Is This Event Important:

Employment in the world’s largest economy is expected to increase another 190K in March following the 192K expansion in the previous month, and the ongoing improvement in the labor market could spark increased demands for the U.S. dollar as the recovery gathers pace. At the same time, the jobless rate is anticipated to hold steady at 8.9%, but we may see another drop in the annualized rate as discouraged workers continue to leave the labor force. In turn, currency traders may show a mixed reaction to the non-farm payrolls report, and the Fed may continue to carry out the additional $600B in quantitative easing as it aims to encourage a sustainable recovery.

Recent Economic Developments

The Upside

The Downside

Businesses in the U.S. may increase their willingness to expand their labor force as private sector consumption continues to pick up, and a marked recovery in employment could lead the Fed to raise its fundamental assessment for the region as growth and inflation accelerate. However, as household confidence wanes, with businesses facing rising input costs, firms may keep a lid on employment, and a dismal NFP report could lead the central bank to maintain a cautious outlook for the real economy given the tepid pace of recovery in the labor market. In turn, the FOMC may retain the expansion in monetary policy throughout the first-half of the year, and the central bank may keep the benchmark interest rate close to zero for the majority of 2011 in an effort to stem the downside risks for growth.

Potential Price Targets For The Release

How To Trade This Event Risk

Forecasts for a sixth consecutive rise in non-farm payrolls certainly reinforce a bullish outlook for the greenback, and the market reaction following the release could set the stage for a long U.S. dollar trade as the outlook for growth and inflation improves. Therefore, if employment increases 190K or greater from the previous month, we will need a red, five-minute candle subsequent to the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, firms may scale back on hiring as they cope with rising commodity prices paired with the tight credit conditions, and a dismal NFP report could trigger a selloff in the greenback as growth prospects deteriorate. As a result, if payrolls increase less than 100K in March, we will implement the same strategy for a long euro-dollar trade as the short position revealed above, just in the opposite direction.

Impact that the U.S. Non-Farm Payrolls report has had on USD during the last month

February 2011 U.S. Non-Farm Payrolls

U.S. non-farm payrolls increased 192K in February following the 63K expansion in the previous month, while the annual rate of unemployment unexpectedly slipped to 8.9% from 9.0% during the same period as discouraged workers left the labor force. A deeper look at the report showed a 222K rise in private payrolls, with employment in manufacturing increasing 33K from the previous month, while public sector jobs weakened another 30K following the 5K contraction in January. After losing over 8 million jobs during the recession, the tepid recovery in the labor market may lead the Federal Reserve to carry out the additional $600B in quantitative easing throughout the first-half of the year, and the central bank may keep the benchmark interest close to zero throughout most of 2011 as it aims to encourage a sustainable recovery. Despite the in-line print, the U.S. dollar lost ground immediately following the release, with the EUR/USD spiking to 1.4000, and the greenback remained battered going into the weekend as the pair closed at 1.3983.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com