What is the favorite roll of the Sushi Chef? Payroll!
The nonfarm payroll employment represents the total number of paid U.S. workers, excluding proprietors, private household employees, unpaid volunteers, farm workers, and the unincorporated self-employed. This measure accounts for approximately 80 percent of the workers who contribute to the GDP. Thus, the analysts see it as a very insightful statistic, which can be used to determine the condition of the labor market. Since the nonfarm payrolls are considered to show the current state of economic activity, the National Bureau of Economic Research analyzes it to determine whether the economy is expanding or contracting. Nonfarm payrolls are also closely watched by the Fed, as they show whether and how quick the economy and inflationary pressure are growing (central bankers consider fast rates of job gains as potentially leading to an increase in inflation). The nonfarm payroll statistic is released monthly, on the first Friday of the month, by the U.S. Bureau of Labor Statistics as part of the Employment Situation Report on the state of the labor market.
Nonfarm Payrolls and Gold
The chart below paints gold prices and the monthly changes in the nonfarm payrolls (in thousands of people). Let’s take a look at it!
As one can see, there is no clear long-term relationship between the gold price and job gains. However, the IMF Working Paper shows that employment statistics (if they surprise investors) move the price of gold in the short-term. Usually, good news for the U.S. labor market (or, actually, better than expected) is positive for the greenback and negative for the shiny metal. The price of gold tends to fall on the day when the Nonfarm Payroll Report comes out. In case of bad news from the labor market, the situation is reversed.
Importantly, how investors react to the surprises, depends on the report’s implications for the Fed’s monetary policy and the short-term interest rates. It was clearly seen in 2015, when practically every release of the jobs report was taken as crucial for the Fed to decide whether the economy is ready for an interest rate hike. But later the importance of the nonfarm payrolls for the gold market diminished somewhat. Therefore, strong (weak) jobs reports confirm that the U.S. economy is in a good (bad) shape, which is bearish (bullish) for the price of gold.
However, the relationship between nonfarm payrolls and gold prices is far from simple. The best example may be the coronavirus crisis. As the chart below shows, the monthly change in nonfarm payrolls (in thousands of people) collapsed, but the price of gold did not skyrocket.
FAQs
If the NFP data is significantly stronger than expected, indicating a strong job market and potential economic growth, traders may consider selling gold as risk appetite increases.
How does gold react to non-farm payroll? ›
Usually, good news for the U.S. labor market (or, actually, better than expected) is positive for the greenback and negative for the shiny metal. The price of gold tends to fall on the day when the Nonfarm Payroll Report comes out.
How does ADP affect gold? ›
Conversely, when the ADP falls short of expectations, the markets start to worry and shift more funds into the safe havens, such as gold.
How many pips does gold move during NFP? ›
Let's also take a look at the XAUUSD statistics. As noted earlier, following an NFP announcement gold can move as much as 25 dollars (2500 pips). This, however, isn't a norm.
What pairs are most affected by NFP? ›
The NFP data is an indicator of American employment, so your currency pairs that include the US Dollar (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and others) are most affected by the data release.
What is the best currency to trade during NFP? ›
The NFP report generally affects all major currency pairs, but one of the favorites among traders is the British pound/U.S. dollar (GBP/USD). Because the forex market is open 24 hours a day, all traders can trade on the news event.
Is non-farm payroll a leading indicator? ›
Is Nonfarm Payrolls a Leading or Lagging Indicator? The nonfarm payroll report is not a leading indicator but provides a snapshot of incidents that affect the overall economy.
How does gold react to stagflation? ›
The point is that inflation makes us all poorer but in such an environment, gold attracts additional interest and can more than keep up with the pace of inflation. It's a proven inflation hedge that protects purchasing power on a long-term basis.
How does NFP affect USD? ›
NFP releases have a general tendency to cause large movements in the forex market. If the Fed decides to lower interest rates to combat high unemployment, it reduces demand for the dollar, causing it's the dollar's price to fall.
Why is gold negatively correlated to stocks? ›
Gold provides diversification in a portfolio and is often correlated with the stock market during risk-on periods, while it decouples and becomes inversely correlated during periods of stress.
While official nonfarm payroll gain is usually affected by bad weather, ADP's data appears to be more stable when a snowstorm or hurricane hits during the second week of the month, as official nonfarm does not include service and construction workers who were unable to work due to bad weather.
How does the Federal Reserve affect gold? ›
Investors might prefer interest-bearing assets like bonds over gold, leading to a decline in the gold price. Conversely, when the Fed cuts interest rates, the lower opportunity cost makes gold more attractive, potentially increasing its price.
What is the correlation between gold and NFP? ›
The Nonfarm Payrolls report is expected to significantly impact the gold market, with a forecast of 175,000 job additions in July. A weaker-than-expected job gains might weaken the dollar and boost gold prices due to its inverse relationship with the dollar.
Can gold move 1000 pips a day? ›
Gold moves 900 to 1500 pips per day. No need to run for many currency pairs. If you do analysis for 4 major currency pairs then you will need lot of time and you will get get few pips. If choose only one Gold pair then You can make more than 200 pips in single day.
How do I trade NFP like a pro? ›
Trading the Initial Reaction
Volatility Trading: Consider trading volatility instruments such as options, futures, or currency pairs with high volatility around the NFP release. Scalping: Implement scalping strategies to capitalize on short-term price movements immediately following the NFP announcement.
What happens when NFP is high? ›
Non-Farm Payroll Data
The increase is an indication that the economy is growing when non-farm payrolls are expanding but this may lead to an increase in inflation. That may be viewed as a negative for the economy if increases in non-farm payroll occur at a fast rate.
What happens to gold with rising interest rates? ›
Gold and interest rates traditionally have a negative correlation in the relationship between the two. It is not guaranteed but usually the gold price goes up when interest rates go down, and down when rates go up.
What happens to gold when GDP increases? ›
Hence, there should be a negative correlation between GDP growth and the price of gold. When the economy expands, investment demand (attracted by the safe-haven character of the shiny metal) falls, and vice versa.
What happens when the gold silver ratio is high? ›
A high ratio can mean that silver is a relative bargain buy. Therefore, it could be an excellent time to buy silver because the price is down. A lower ratio can mean the reverse: Gold might be more affordably priced, and you may want to buy gold while the price is relatively lower than it would be at a higher ratio.
