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

U.S. non-farm payrolls are projected to increase another 185K in April following the 216K expansion during the previous month, and the ongoing recovery in the labor market could generate a bullish reaction in the greenback as the prospects for future growth improves.

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

What's Expected:

Time of release: 05/06/2011 12:30 GMT, 8:30 EST

Primary Pair Impact:EURUSD

Expected: 185K

Previous: 216K

DailyFX Forecast: 150K to 250K

Why Is This Event Important:

U.S. non-farm payrolls are projected to increase another 185K in April following the 216K expansion during the previous month, and the ongoing recovery in the labor market could generate a bullish reaction in the greenback as the prospects for future growth improves. In turn, the Federal Reserve may see scope to gradually normalize monetary policy later this year, and Chairman Ben Bernanke may soften his dovish tone for monetary policy as the central bank plans to conclude its easing cycle heading into the second-half of 2011. However, as risk trends continues to dictate in the foreign exchange market, the seventh consecutive rise in U.S. employment could generate an increased appetite for higher yields, and a shift in trader sentiment could make it increasingly difficult to trade the release as market liquidity tends to thin ahead of the weekend.

Recent Economic Developments

The Upside

Release	Expected	Actual
Personal Consumption (1Q A)	2.0%	2.7%
Durable Goods Orders (MAR)	2.3%	2.5%
Consumer Confidence (APR)	64.5	65.4
Industrial Production (MAR)	0.6%	0.8%

The Downside

Release	Expected	Actual
ADP Employment Change (APR)	198K	179K
GDP (Annualized) (1Q A)	2.0%	1.8%
ISM Non-Manufacturing (Employment) (APR)	--	51.9
ISM Manufacturing (Employment) (APR)	--	62.7

As the rebound in private sector consumption accelerates, businesses may continue to increase their rate of production over the coming months, and firms may rapidly expand their labor force in order to keep up with rising demands. However, as economic activity slows, with the recent batch of economic developments reinforcing a weakened outlook employment, the U.S. labor market could face a prolonged recovery going forward as households and businesses cope with higher energy costs. A slower pace of hiring in the U.S. could lead the Fed to retain a zero interest rate policy for most of 2011 as it aims to encourage a sustainable recovery, and Chairman Bernanke may continue to talk down speculation for higher borrowing costs given the ongoing weakness within the private sector.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a seventh straight increase in non-farm payrolls certainly generates a bullish outlook for the greenback, and the ongoing recovery in the labor market could pave the way for a long U.S. dollar trade as the outlook for growth improves. Therefore, if the world's largest economy adds 185K jobs or more in April, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these preconditions 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 be used to set the 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 order to preserve our profits.

On the other hand, businesses across the nation may keep a lid on employment as the rebound in economic activity cools, and employment growth may continue to slow over the coming months as households and businesses cope with higher costs paired with the ongoing weakness within the private sector. AS a result, if payrolls expand less than 150K, we will implement the same strategy for a long euro-dollar trade as the short position laid out 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)
Mar 2011	04/01/2011 12:30 GMT	190K	216K	-34	+89

March 2011 U.S. Non-Farm Payrolls

Employment in the world's largest economy increased 216K in March following the 192K expansion in the previous month, while the jobless rate pulled back to 8.8% from 8.9% as discouraged workers continue to leave the labor force. A deeper look at the report showed private sector employment increased 230K from the previous month, with manufacturing payrolls increasing another 17K, while government jobs slipped 14K following the 46K contraction in February. As the Fed expects unemployment to remain elevated for some time, the central bank is likely to carry out the additional $600B in quantitative easing throughout the first-half of the year, and Chairman Ben Bernanke may look to support the real economy for most of 2011 in an effort to encourage a sustainable recovery. Nevertheless, currency traders showed a bullish U.S. dollar reaction to the report, with the EUR/USD falling back to 1.4060, but the market reaction was certainly short-lived as the exchange rate settled at 1.4227 by the end of the day.

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