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EUR/USD: US Dollar Volatility Elevated Around Nonfarm Payrolls

EUR/USD: US Dollar Volatility Elevated Around Nonfarm Payrolls

2019-12-06 12:00:00
Rich Dvorak, Analyst
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CURRENCY VOLATILITY: US DOLLARRIPE FOR VIOLENT SWINGS AROUND NONFARM PAYROLLS DATA

EUR/USD is the world’s most liquid and heavily traded forex pair. This can make spot EUR/USD price action less volatile compared to other pairs such as AUD/JPY or emerging market currencies. Yet, that is not to say spot EUR/USD goes without brief episodes of large price swings.

Volatility, broadly speaking, arises during times of heightened market uncertainty and in response to high-impact economic events and data releases. As such, closely watched economic indicators that are largely viewed as market moving or having potential to sway central bank monetary policy decisions can be expected to spark forex volatility. One such economic event that usually sparks a dramatic move in spot EUR/USD is the monthly release of US nonfarm payroll employment data.

EUR/USD PRICE CHART: WEEKLY TIME FRAME (NOVEMBER 2015 TO DECEMBER 2019)

EURUSD Price Chart US Dollar Volatility and Nonfarm Payrolls

US nonfarm payrolls (NFP) data – also referred to informally as the monthly US jobs report – is released by the Bureau of Labor Statistics (BLS), which provides market participants with a detailed summary of the employment situation and labor market conditions in America. In light of the Federal Reserve’s stated dual-mandate of stable prices and maximum employment, it is unsurprising that US Dollar forex traders place great importance on the monthly US NFP report.

CHART OF US DOLLAR VOLATILITY SPIKING AROUND NONFARM PAYROLLS

US Dollar Chart of EURUSD Volatility and Nonfarm Payrolls Data Releases

In fact, spot EUR/USD volatility jumps exponentially around the time monthly US nonfarm payroll data is released. Judging by the currency market’s historical reaction to the US NFP report, EUR/USD forex traders might expect spot prices to swing +/- 36 pips on average around the 15-minute bar when the jobs data is published. This compares to the average 15-minute change in spot EUR/USD of +/- 4 pips dating back to January 2015.

CHART OF EUR/USD PRICE ACTION IN RESPONSE TO MONTHLY NONFARM PAYROLLS DATA

US Dollar Price Chart EURUSD Volatility and Nonfarm Payrolls Data Release

What might explain the sharp reaction in spot EUR/USD to the release of monthly US NFP data? As with forecasting any number, the actual outcome of the report remains highly ambiguous – even top economists have difficulty estimating the headline number for monthly change in nonfarm payrolls.

Consequently, the knee-jerk reaction in spot EUR/USD surrounding the monthly US jobs report release can be principally explained by market participants aligning past expectations with current fundamentals. As such, it is worth noting that volatility is typically greater when the actual data reading differs materially from what is expected according to market forecasts.

That said, the sharp dip immediately following the US NFP report release indicates that, on average, the US Dollar appreciates relative to the Euro around this economic event. This could be explained by US NFP data surprises to the upside broadly outweighing surprises to the downside over the last 4 years, which is suggested by the cumulative drift lower in spot EUR/USD surrounding the monthly US jobs report.

CHART OF US DOLLAR REACTION TO NONFARM PAYROLLS

EURUSD Price Chart of US Dollar and Nonfarm Payrolls

While past performance is not indicative of future results, analyzing historical price action in spot EUR/USD around monthly US nonfarm payroll reports reveals that volatility tends to rise and provides its own degree of insight for forex traders. That said, it will likely prove beneficial to incorporate forex trading risk management techniques into your strategy – such as setting tighter stops or reducing leverage – particularly in consideration of heightened volatility that could be expected in spot EUR/USD around monthly US nonfarm payroll reports.

Read more: US Dollar Volatility Due to Rise with Jobs Data & Fed on Deck

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-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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

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