Forex trading: Markets are looking ahead to this week’s non-farm payrolls report from the US; the monthly labour market indicator used as a barometer of the country’s economic health.

Recent NFP numbers have come in ahead of forecasts, but US Q1 GDP figures point to a slowing in growth that could impact the jobs market.

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What are non-farm payrolls?

 

Released on the first Friday each month, the non-farm payrolls figures – or NFP – detail the number of jobs created by US employers over the last month.

Over the last couple of years, the jobs numbers have been a key test of US economic strength used by the Federal Reserve to guide its monetary policy.

A string of good numbers has taken the shine of the NFP numbers a little – any lingering doubt around job creation has been dispelled and the big questions are over wages and growth. Nevertheless, the data event is among the most closely watched fundamental indicators in forex trading.

Past performance

 

April and March blew past forecasts after a lacklustre February figure. Overall, the figures have been solid for the last six months, leading the Fed to view the labour market as being on a sure footing, even if GDP growth across the economy seems to be fading.

At its last meeting, officials noted that “labor market conditions have improved further even as growth in economic activity appears to have slowed”

Thanks to the volume of jobs being created, the US unemployment rate recently fell to its lowest level since 1973, slipping below 5% in January.

 

Fed in focus

 

As ever, the NFP figures need to be viewed in the context not only of the broader health of the US economy, but also through the lens of the Federal Reserve and its monetary policy.

All things being equal, better jobs numbers help fuel speculation the US central bank is closer to raising rates; while worse-than-expected figures suggest it’s further away from tightening.

The Fed’s next meeting is in June, and it looks like it’s going to be a “live” one, meaning an interest rate hike is definitely on the table.

Atlanta Fed president Dennis Lockhart said this week that rates could still rise twice this year, although it depends on the economic data.

The jobs numbers are still central to this, however growth in the jobs market may not be enough to sway the Fed when inflation is failing to pick up and GDP is expanding at a snail’s pace. Initial estimates suggest the US economy grew by just 0.5% in the first quarter.

Fed funds futures trading points to a roughly one in eight chance of the bank raising rates in June. The NFP numbers could have an effect on market expectations.

Forex focus

 

Coming into the NFP numbers, the US dollar looks very much on the back foot. It’s slumped to an 18-month low versus a firmer yen and had sunk to its weakest level versus the euro since August 2015.

Sterling has also proved resilient to the greenback, rising to a year high as fears about Britain leaving the European Union subside.

The non-farm payrolls report is released alongside US unemployment data at 08:30 ET (13:30 BST) on Friday May 6th. The next Federal Reserve meeting is scheduled to take place June 14-15th.