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

U.S. Non-Farm Payrolls are projected to increase another 170K in May, and the ongoing improvement in the labor market should spur a bullish reaction in the U.S. dollar as private sector spending remains one of the leading drivers of growth.

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

What's Expected:

Time of release: 06/03/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 170K

Previous: 244K

DailyFX Forecast: 140K to 200K

Why Is This Event Important:

U.S. Non-Farm Payrolls are projected to increase another 170K in May, and the ongoing improvement in the labor market should spur a bullish reaction in the U.S. dollar as private sector spending remains one of the leading drivers of growth. As employment in the world's largest economy gathers pace, the Federal Reserve may see scope to start withdrawing monetary stimulus later this year, and Chairman Ben Bernanke may soften his dovish tone for future policy as growth and inflation pick up. However, trading the event risk may not be as clear cut as some of our previous trades as risk sentiment continues to dictate price action in the currency market, and a better-than-expected NFP's report could generate a bearish reaction in the greenback as investors increase their appetite for yields.

Recent Economic Developments

The Upside

Release	Expected	Actual
Consumer Credit (MAR)	$5.000B	$6.016B
Business Inventories (MAR)	0.9%	1.0%
Wholesale Inventories (MAR)	1.0%	1.1%

The Downside

Release	Expected	Actual
ADP Employment Change (MAY)	175K	38K
ISM Manufacturing (Employment) (MAY)	--	58.2
Gross Domestic Product (1Q P)	2.2%	1.8%

As businesses restock their inventories at a faster pace, firms may increase their labor force throughout 2011, and labor growth may accelerate over the coming months as private sector consumption gathers pace. However, the slowdown in production paired with the smaller-than-expected expansion in the growth rate certainly raises the risk of seeing a dismal payrolls report, and the Fed may look to support the economy throughout the remainder of the year as policy makers aim to encourage a sustainable recovery. Although the FOMC plans to conclude its easing cycle in June, the committee may retain its zero interest rate policy in the second half of the year, and U.S. dollar may face additional headwinds over the coming months as interest rate expectations falter.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for an eighth consecutive increase in U.S. employment certainly reinforces a bullish outlook for the greenback, and the release could set the stage for a long dollar trade as growth prospects improve. Therefore, if NFP's increase 175K or greater in May, we will need a red, five-minute candle subsequent to the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, 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 gauge the first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, firms may scale back on hiring as the recovery cools, and a dismal payrolls report could encourage the FOMC to retain a zero interest rate policy throughout 2011 as it aims to curb the downside risks for the economy. As a result, if employment increases less than 140K from the previous month, we will implement the same strategy 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)
Apr 2011	05/06/2011 12:30 GMT	185K	244K	+21	-153

April 2011 U.S. Non-Farm Payrolls

The world's largest economy added 244K jobs in April, marking the largest rise in employment since May 2010, while the jobless rate increased to 9.0% from 8.8% during the same period as discouraged workers returned to the labor force. A deeper look at the report showed a 268K rise in private payrolls paired with a 29K increase in manufacturing jobs, while government jobs slipped another 24K following the 10K contraction in March. The faster pace of growth in the U.S. labor market certainly encourages an improved outlook for the economy, and the Fed may see scope to start normalizing monetary policy later this year as it plans to conclude its easing cycle in June. The initial reaction to the report was short-lived as the EUR/USD bounced back from 1.4455 to 1.45773, but the U.S. dollar appreciated going into the end of the week as a shift in risk sentiment sparked increased demands for the reserve currency.

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