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Understanding the United States Jobs Market

The currency market or the Forex market is made of currencies from around the world that free-float against each other. This is paper money issued by central banks.

Paper money’s value is as good as the trust people have in it and the overall financial system. When something goes wrong in the world (e.g. geopolitical events, elections, 2008 financial crisis, etc.), people/investors run for safety.

Safety is found in gold, currencies that have a safe-haven status (CHF, USD to some extent), and other things like real-estate and so on. When it comes to currencies, central banks play an important role.

For trader’s point of view, currencies should be divided into two categories: the US dollar and the rest of them. This is because the US dollar is the world’s reserve currency and what happens with it is key.

We all know that currencies worth more or less depending on the interest rate level. The higher the interest rate level is, the stronger the currency, and the other way around.

On the other hand, the central bank sets the interest rate. Therefore, what the central bank does with the rates will affect the currency.

For the most important currency in the world (the US dollar, the world’s reserve currency), the Federal Reserve of the United States sets the interest rate. From this point of view, the Fed is the world’s central bank.

It is no wonder that the Fed has a different mandate than the other central banks in the world. While the ECB (European Central Bank), BOE (Bank of England), BOC (Bank of Canada), BOF (Bank of Japan) and so on, have only one mandate (to keep inflation below or close to two percent), Fed looks at the jobs data too.

For this reason, the Fed task is more complicated: it moves rates for the biggest economy in the world and for the world’s reserve currency, and, in doing that, it balances the jobs market risks with the inflationary risks. That’s not an easy task.

What to Look for in the US Jobs Market

A trader’s analysis should start from what matters for the central bank when it comes to raising or hiking the interest rate. This matters for that respective currency too.

Besides inflation, the Fed looks at job creation. The mandate specifies that the Fed moves rates based on how well the jobs market is doing.

This makes the jobs data in the United States extremely relevant. To some extent, it is even more important than the CPI (Consumer Price Index – index).

The reason for that comes from the fact that other players in the world look at how well the US economy is doing. A healthy economy in the States will spill over the world and the benefits will spread.

On the other hand, a recession in the United States will make other countries suffer too. Hence, jobs data is a vital piece of economic information.

Non-Farm Payrolls

The NFP or the Non-Farm Payrolls release holds the key to what the Fed will do with the rates at their next meeting. This release comes on the first Friday of every month, at 08:30 AM East Coast time (New York time).

Traders from around the world look at the actual number: if it is better than expectations, this is bullish for the dollar. If not, the dollar will fall.

However, while everyone focuses on the NFP number, other jobs related data comes at the same time. While not looking that important, sometimes these pieces make the overall puzzle. After all, the devil is in the details, right?

Here’s a list of the job-related data that comes at the same time with the NFP:

  • Unemployment Rate. Very important economic release, as, at one moment in time, the Fed used it as a threshold for hiking rates: no hikes until the unemployment rate reaches a specific level. As a rule of thumb, the lower the unemployment rate is, the better.
  • Average Hourly Earnings. This is a crucial piece of information. While it comes from the details in the jobs data, it has much to do with inflation. The bigger the number, the bigger the inflation, hence the more hawkish for the dollar. Sometimes, if the NFP misses a bit, but the Average Hourly Earnings beat the expectations, it is enough for the dollar to rise as it refers to the second part of the Fed’s mandate.
  • Labor Participation Rate. While secondary data, it shows how many people do work in the United States. The higher the number, the better. The lower, the more clouds will be on the NFP number and the unemployment rate. Because the unemployment rate is calculated as a percentage, if the Labor Participation Rate indicator shows a lower value, the percentage applies to a smaller number, which distorts the data.
  • Revisions. This is a tricky release. Together with the NFP release, past numbers are often revised higher or lower. Sometimes these revisions give the real direction of the market after the NFP release and not the actual number with the release.

Initial Jobless Claims and Continuing Claims

Besides the NFP and the collateral data that comes with its release, on a weekly basis, Thursdays, the Initial Jobless Claims, and the Continuing Claims indicators give clues about the jobs market’s health.

While lagging (they refer to the data from the previous week), traders look at them to form an educated guess about what the NFP will print next.

ISM Non-Manufacturing and Manufacturing

These two releases have an employment component in their structure. This matters most, especially the data in the services (non-manufacturing) sector.

The US economy is a service based economy (meaning the biggest chunk of the GDP relates to the services sector) and therefore the services sector jobs data has the biggest influence on the NFP release.

All these details sometimes matter the most for ending up on the right market direction after the NFP release. For sure, they ALL matter for the Fed when deciding to cut or hike rates.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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