EUR/USD: Trading the Change in U.S. Non-Farm Payrolls

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

Why Is This Event Important:

As the labor market in the world’s largest economy is expected to improve for the first time in five-months, the data could lead the U.S. dollar to recoup the losses from earlier this week as the outlook for future growth improves. However, as risk trends continue to dictate price action in the currency market, a rise in market sentiment could produce a bearish reaction in the greenback as investors flood into higher-yielding currencies.

What’s Expected:

Time of release:11/05/2010 12:30 GMT, 8:30 EST

Primary Pair Impact :EURUSD

Expected: 60K

Previous: -95K

Will This Be Market Moving (Scenarios):

U.S. non-farm payrolls are forecasted to increase 60K in October after contracting 95K in the previous month, while the annual rate of unemployment is projected to hold steady at 9.6% for the third consecutive month. As private sector consumption remains one of the lead drivers of growth, a rise in employment is likely to foster an enhanced outlook for the economy, and the data could lead market participants to scale back speculation for further easing as the recovery slowly gathers pace.

The Upside

The advanced 3Q GDP report showed economic activity expand at a faster pace from the previous period, with the growth rate rising at an annualized pace of 2.0%, and businesses may show an increase their willingness to expand their labor force over the coming months as the central bank continues to support the real economy. With firms increasing their rate of production, we could see a sharp rebound in employment, and a larger-than-expected rise in non-farm payrolls could spark a bullish reaction in the greenback as the fundamental outlook picks up.

The Downside

However, as firms face higher input costs paired with a gradual rise in household spending, businesses may keep a lid on employment throughout the remainder of the year as the economic outlook remains clouded with uncertainties. A dismal labor report could lead the Fed to take additional steps over the coming months as it aims to foster a sustainable recovery, and speculation for further easing could fuel the bearish sentiment underlying the U.S. dollar as the central bank maintains a cautious outlook for the economy.

How To Trade This Event Risk

Expectations for a rise in employment favors a bullish outlook for the greenback, and price action following the release could set the stage for a long U.S. dollar trade as growth prospects improve. Therefore, if non-farm payrolls increase 60K or more in October, we will need to see a red, five-minute candle following the data to generate 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 establish our first objective. The second target 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 an effort to lock-in our profits.

In contrast, fears surrounding the economic outlook paired the ongoing slack within the private sector could weigh on business sentiment, and firms may lower their temperament to expand their labor force as the Fed maintains a cautious outlook for the nation. As a result, if employment expands less than 20K or unexpectedly contracts from the previous month, we will implement the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

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

September 2010 U.S. Non-Farm Payrolls

The world’s largest economy lost 95K in September amid forecasts for a 5K decline, while the annual rate of unemployment unexpectedly held steady at 9.6% for the second month as discouraged workers left the labor force. The breakdown of the report showed employment in manufacturing slipped 6K during the month, with the public sector shedding 159K jobs, while private sector employment increased 75K amid projections for a 64K rise. As the labor market remains weak, market participants speculate the central bank to ease monetary policy further over the coming months, and the Fed may look to inject increased liquidity into the financial markets as the benchmark interest rate remains close to zero. At the same time, the FOMC may turn increasingly dovish as price growth remains subdued, and the central bank may look to support the economy throughout the first-half of the following year as it aims to encourage a sustainable recovery.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

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