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EURUSD: Trading the U.S. Non-Farm Payrolls Report

EURUSD: Trading the U.S. Non-Farm Payrolls Report

David Song, Strategist

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

What’s Expected:

Time of release: 09/07/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 130K

Previous: 163K

DailyFX Forecast: 100K to 160K

Why Is This Event Important:

U.S. Non-Farm Payrolls are expected to climb only 130K in August and the slower rate of job growth may drag on the dollar as it fuels speculation for another large-scale asset purchase program. As Fed Chairman Ben Bernanke keeps the door open to expand the balance sheet further, the tepid recovery in the labor market may prompt the FOMC to take additional steps to strength the recovery, but a positive development may ultimately sap bets for QE3 as it limits the threat for a double-dip. However, as market sentiment continues to influence the currency market, a shift in risk-taking behavior may ultimately produce a mixed reaction, and we may need a fairly large deviation from market expectations to have a tradable event as participation thins ahead of the weekend.

Recent Economic Developments

The Upside

Release

Expected

Actual

ISM Non-Manufacturing - Employment (AUG)

--

53.8

ADP Employment Change (AUG)

140K

201K

Challenger Job Cuts (YoY) (AUG)

--

-36.9%

The Downside

Release

Expected

Actual

ISM Manufacturing (AUG)

50.0

49.6

Consumer Confidence (AUG)

66.0

60.6

Housing Starts (JUL)

756K

746K

As the recent batch of data coming out of the world’s largest economy highlights an improved outlook for the labor market, we may see another upside surprise in August, and an upbeat employment report should instill a bullish forecast for the greenback as it curbs speculation for more easing. However, the slowdown in production paired with the ongoing weakness in building activity may continue to drag on job growth, and we may see businesses scale back on hiring as the ‘fiscal cliff’ casts a dour outlook for growth.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Non-Farm_Payrolls_Report_body_ScreenShot015.png, EURUSD: Trading the U.S. Non-Farm Payrolls Report

Although the EURUSD maintains the upward trending channel from the end of July, the pair remains capped by at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around the 1.2640-50, and the Non-Farm Payrolls report may trigger a sharp reversal in the exchange rate should the data limit the case for another round of quantitative easing. However, should development reflect a weakening outlook for the world’s largest economy, we may see the EURUSD continue to retrace the decline from earlier this year, and we would need to see a close above the 23.6% retracement to see the bullish formation continue to take shape.

How To Trade This Event Risk

The slower pace of job growth certainly casts a bearish outlook for the greenback, but another upside surprise in NFPs could pave the way for a long U.S. dollar trade as it dampens the scope for QE3. Therefore, if employment increases 130K or greater, we will need a red, five-minute candle following the print to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate 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 hits its mark in an effort to lock-in our gains.

In contrast, the ongoing slack in the economy paired with threat of the ‘fiscal cliff’ may push businesses to scale back on hiring, and a dismal print may spark a bearish reaction in the greenback as it fuels speculation for more easing. As a result, if the report falls short of market expectations, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL 2012

08/03/2012 12:30 GMT

100K

163K

+47

+140

July 2012 U.S. Non-Farm Payrolls

EURUSD_Trading_the_U.S._Non-Farm_Payrolls_Report_body_ScreenShot014.png, EURUSD: Trading the U.S. Non-Farm Payrolls Report

U.S. employment increased another 163K in July to mark the largest advance since February, while the jobless rate unexpectedly advanced to 8.3% from 8.2% even as discouraged workers left the labor force. Despite the better-than-expected print, the dollar struggled to hold its ground following the report, with the EURUSD climbing back above the 1.2300 figure, and the greenback continued to lose ground throughout the North American trade as the pair ended the day at 1.2383.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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