We're used to hearing the huge impact of NFP on USD or other currencies in the forex market. But, how about its effect on gold? Are there any specific strategies to be prepared?

The NFP or Non-farm payroll is an employment report that the United States Bureau of Labor Statistics releases every month which contains the analysis of the change in employment in the United States. The economic data impacts price movements for the US dollar, US treasuries, US equities, gold, and other common instruments available across the financial markets.

The NFP report is quite significant as it is a vital economic measure that shows the prevalent market conditions affecting the economy of the United States. Considering that the US economy is consumer-driven, increases in wages and the general health of the labor market have a direct impact on consumer health. This means that if the employment rate is high along with a rise in wages, many individuals will be delighted and more likely to spend their income which results in an overall boost to the economy.

When it comes to the impact of NFP on Gold, experts have concluded that there is no clear long-term relationship between the price of gold and increased employment rate. However, they maintain that employment figures tend to affect the price of gold in the short term. Normally, this tends to be positive news for the United States labor market while it is bad news for gold. This is because on the day the NFP data is released, the prices of gold and other precious metals like silver tend to drop.

How to Trade Gold on NFP

However, if the news from the labor market is unfavorable, then the situation is reversed as the implications of the monetary policy and short-term interest rates of the US Federal Reserve determine the reaction of traders. Even then, the relationship between the NFP figures and gold prices remains inconclusive. For example, after the spread of the coronavirus pandemic around the world, the NFP report showed a reduction in the rate of employment, and yet, gold prices continued to be low.

The gold market adapts to the NFP report by adjusting its price depending on the actual news release of the NFP data rather than the projected one. Irrespective of whether the real NFP figures turn out to be below, above, or equivalent to the market expectations, the gold market still adjusts price movements based on the released data. Below are three of the strategies that can be used to trade gold on NFP release:

 

Trade before the NFP Report

Due to the NFP data being a significant source of volatility, it tends to cause major price movements in the market which is why this strategy involves studying the price action diligently on a trading chart. The steps involved are:

  • The highs and lows of the last four-hour trading period should be pinpointed 15 minutes before the NFP output is made public.
  • A buy order should be positioned below the range's high while a sell order should be positioned below the range's low.
  • A secure stop-loss should be positioned on the other side of the range for the two orders.
  • Wait for the initial reaction of the NFP to activate one of the orders.
  • The other pending order should be canceled once an open position size is acquired.
  • The take-profit can be determined using the target price.

 

Trade the Fade

This involves initiating trades in a contrasting direction to the reaction of the NFP original release. The major parts of this strategy include planning with steps, waiting for the signal, and then placing trades based on the outcomes.

This strategy runs on a perception that the actual data release may trigger an overreaction from traders which usually leads to intense market activity. After the market eventually settles down, traders can then start to evaluate the size of their positions and choose whether to take their profits or reduce the losses. This kind of activity creates a suitable short-term opening for traders to take advantage of, considering the ambiguous relationship between gold and the NFP report. Of course, it's best to trade on broker that offers a low spread on gold trading.

 

Apart from US economic data like NFP, gold price analysis can be influenced by the precious metal's relation to silver. Explore the theory further in How to Use the Gold to Silver Ratio for Strategic Investment.