Today is the NFP day, and for the trading and investing community, nothing else matters. Everyone discounts the entire trading week as the release ahead may be a game-changer. It often was and certainly has the potential of changing market dynamics.
What Should FX Traders Do?
The FX market is particularly affected by the NFP release. This is one example of economic data heavily traded by algorithms. Perhaps, as a trader, you often wondered why prices move so aggressively in a fraction of a second after the NFP announcement? The explanation comes from the high-frequency industry. This industry thrives from being the first to react on economic data – if the actual is better than the forecast, algos buy the USD. If not, they sell it. However, the holding period is less than a second or even a fraction of a second, as algos buy and sell thousands of trades in a blink of an eye.
For the retail trader, the details in the NFP report are more important than the first market reaction. Therefore, traders have two options. If they have an open position ahead of the NFP, the position has a time horizon beyond the NFP release. Should the market move in the right direction as a result of the NFP release – good. If not, the position is there for a different reason, and, ideally, from an analysis on the bigger timeframes than the 4h chart.
Another option is to sit and wait for the release and then have a look at the data. Plenty of info in the report may cause the price action to shift gears and direction. For instance, revisions of previous data. Or the labor participation rate, changes in the Unemployment Rate, etc.
Previous job data releases help, but they do not guarantee the NFP outcome. The ADP or private payroll number is the perfect example.
Last month, it showed much better than expected actual job numbers. Naturally, the expectations grew that the NFP will confirm the strong bounce in the labor market. Yet, it did not, as the previous NFP report was disastrous.
Two days ago, it was the ADP’s turn to disappoint. While the U.S. private sector did create jobs, the data is well below what the market expected.
Will the NFP still deliver a positive surprise later today?