The ADP Employment data, popularly known as Non-Farm Payroll or NFP for short, has been either the joy of many traders or the regret of many.
NFP is one of the most popular data releases and is considered very volatile. It represents the total number of paid US workers excluding the farming industry, government employees, private household employees, and employees of non-profit organizations, making it very important data in the labor market.
You may ask; but why do traders care about this data release so much? This is because job creation is a vital indicator of consumer spending and this accounts for the overall economic activity. The non-farm payroll data is released by the U.S. Bureau of Labor Statistics on the first Friday of every month.
Employment Data and Monetary Policies
I wrote a post on interest rate and how it affects the price of Gold. But then, I will love to add that one of the ways the Federal Reserve Bank decides whether to increase or decrease interest rate is via employment data.
Expansionary monetary policies are adopted whenever the rate of unemployment is high. The central bank now seeks to boost economic activities by providing loans at low rates to banks and businesses which in one way or another creates more jobs in the economy.
In the event of a higher-than-usual employment rate, the apex money bank uses the contractionary monetary policy to reduce money circulation and keep the economy regulated.
Non-Farm Payroll and Gold Price
First, it is important to note that when the non-farm payroll data is stronger than expected, it is good for the U.S. economy and hence, a stronger dollar. The effect of this is a decline in the yellow metal because now the Fed has more room to tighten monetary policies by reducing the money supply or the amount of cash in circulation.
On the flip side, when the NFP data release is weaker than expected, people start worrying and begin to shift their funds to safe haven currencies such as Gold.
I will also point out that Gold does not really have a long-term relationship with employment data, but in the short run, based on the interpretation traders give to the NFP data as it relates to the monetary policy effect that follows its release, it could either favor the dollar or not, and whatever affects the dollar will affect the base currency – gold.
The Implication
Why should you pay attention to NFP when trading gold? Employment data has a significance on the dollar index. In the short run, a strengthened dollar index might mean a decline in the gold price and vice versa.
