Why does NFP cause movement in the financial markets? What every trader needs to know

Every first Friday of the month, the global market enters a quiet “wait-and-see” mode because the monthly figures are the key to the market’s next move. Known as Non-Farm Payroll (NFP), this data on employment impacts decisions made by the Federal Reserve and ultimately affects our wallets.

Why is the US so special, and what exactly is non-farm?

Simply put, the United States has the largest economy in the world. Employment figures in this country serve as a mirror reflecting whether businesses are expanding or contracting.

Non-Farm Payroll (NFP) measures the increase or decrease in the number of employed people in the US’s industrial and service sectors, excluding agriculture. The reason is that agricultural employment is seasonal and volatile, making the data less reliable.

Conducted by the U.S. Bureau of Labor Statistics, the NFP figure has become one of the most closely watched economic indicators by traders and investors, more so than other economic data.

What happens when NFP rises?

When the NFP report shows a decrease in unemployment (more people employed), it means:

The Federal Reserve (Fed) will consider raising interest rates because increased employment indicates a strong economy and potential inflation. The Fed then raises rates to cool down the economy.

NFP figures influence the Federal Open Market Committee (FOMC) decisions, which set the baseline interest rates in the US. When rates change, markets worldwide—from forex to stocks—move in response.

What if NFP drops?

When employment outside agriculture declines, it indicates:

• Businesses are contracting; more people are jobless, and consumer confidence may decrease.
• The Fed might lower interest rates to stimulate the economy; lower rates make borrowing cheaper and encourage spending.
• Safe-haven assets like gold and other commodities regain interest as investors seek refuge.

Which markets are most affected?

Forex - The most dynamic

If NFP is good, people worldwide rush to buy US dollars because the US is the investment magnet. USD prices surge, significantly impacting currency pairs like EUR/USD, GBP/USD, AUD/USD.

Stock indices - More complex

Here, two opposing forces are at play:

• Good NFP = Business focus = Stocks are attractive
• But good NFP = The Fed might raise rates = Stocks become more expensive (because of increased discounting of future cash flows)

Often, the second force is stronger: S&P 500, Dow Jones, NASDAQ may fall instead of rising.

Commodities - Gold, Oil

If NFP is poor, gold and silver prices often rise because they are safe-haven assets.

How to trade NFP data profitably

Most NFP traders fall into two categories:

Type 1: Trading after the actual release (News Trading)

• At the moment NFP is announced, markets often move significantly. Traders take profits from the initial spike.
• Risk: High volatility can lead to slippage and stop-outs.

Type 2: Trading before the announcement (Expectation Trading)

• Analyzing analyst forecasts for the upcoming number.
• If expecting worse-than-expected data, take a short USD position (or sell stocks).
• Risk: Similar to gambling on an unknown outcome.

Type 3: Trading the reaction after the announcement (Reaction Trading)

• Wait for the market to settle and then follow the main trend.
• Lowest risk but also lower profit potential.

Other indicators to watch

NFP is powerful but not alone. Consider these as well:

• Unemployment Rate - When does it decrease? It affects inflation.
• Wage Growth - Faster wage increases can lead to inflation.
• Average Hours Worked - Longer hours suggest a healthy business environment.

Examples of how NFP has moved markets

Previously, when NFP exceeded expectations (e.g., 300,000 jobs added versus 200,000 expected), forex markets moved 200-500 pips, while stock markets often declined 1-2%.

If NFP is weak (e.g., only 100,000 jobs added versus 250,000 expected), USD prices may plunge, forex markets become volatile, and gold prices may spike.

Summary in simple terms

To sum up, Non-Farm Payroll (NFP) is an auxiliary indicator used by the Fed to gauge the US economy. Based on this reading, the Fed decides whether to raise or lower interest rates.

When interest rates change, financial markets—from forex, stocks, bonds, to commodities—react accordingly.

If you want your trading to be logical rather than guesswork, NFP news is one of the signals you shouldn’t ignore. But you must understand whether NFP is rising or falling, what it indicates, and how the market will move—that’s the language of the market.