Trading Strategy on NFP and CPI Releases: How to Profit from Market Moves

An overview of NFP and CPI data

There are two key indicators that traders use to predict market movements: non-farm payrolls (NFP) and consumer price index (CPI). These indicators directly affect currency, stock, bond, and commodities markets. They help us understand how the economy is doing and can influence decisions made by central banks, such as changing interest rates. In this article, we will explore the changes in NFP and CPI, and how to adjust your strategies accordingly.

What is NFP?

Non-farm payrolls is a monthly report that comes from the U.S. Department of Labor. It shows how many new jobs were added to the economy in a given month, excluding certain types of workers. This report is a key indicator of the health of the U.S. job market and overall economy. It helps us understand how well the economy is doing.

The markets, especially the currency market, pay close attention to this jobs data. A strong increase in jobs can indicate economic growth, while a weak report could suggest a possible recession. For instance, on March 10, 2023, the NFP report revealed an increase of 311 000 jobs, surpassing the expected 205 000. This led to a rise in the prices of currency pairs like USDEUR and USDGBP, with forex traders increasing their bets on the US dollar.
The Federal Reserve closely watches NFP data because employment levels impact inflation and the economy as a whole. If job numbers go up, it could mean higher inflation and prices, prompting the Fed to consider raising interest rates. NFP data also influences Treasury yields, which reflect the economy’s strength. A strong jobs report can lead to higher yields as markets anticipate tighter monetary policy. In July 2023, following a solid NFP report, U.S. 10-year Treasury yields jumped.

If NFP data is significantly above or below expectations, it can cause sharp swings in currency, stock, and bond markets. High NFP usually strengthens the U.S. dollar, while a low indicator can weaken it.

What is the CPI?

The consumer price index (CPI) shows how the prices of a basket of consumer goods and services (food, housing, healthcare, and so on) change. It is the main indicator of inflation in the U.S. and experts often use it to gauge living expenses.

Inflation directly impacts money’s purchasing power and central banks’ decisions. It shows how fast the prices of goods and services are rising.
It is the usual policy of the Federal Reserve to raise interest rates because of high inflation. This affects the value of the currency. For instance, when in November 2024 the CPI in the U.S. exceeded forecasts, it strengthened the USD as investors expected a more hawkish stance from the Federal Reserve.

Markets can become very volatile in response to unexpected changes in inflation. For example, if inflation is much higher than expected, this can lead to higher rates, which puts pressure on stocks and weakens the bond market. Weak inflation could weaken currencies and support rising stock prices.

Inflation data can make equity markets change. Higher CPI data may discourage investors, because the rising of borrowing costs is very likely. Conversely, slowing inflation, as projected for December 2024 (CPI at 3.8% vs. 4% before), indicates potential rate cuts, supporting stock valuations.
CPI influences bond yields as well. High inflation usually leads to higher yields — investors demand greater returns to cover the loss of purchasing power. The declining inflation in late 2024, for example, has prompted expectations of rate cuts, which impacts bond pricing favorably.

Predictions and expectations: analyzing asset behavior before the NFP and CPI release

Traders and analysts constantly predict how NFP and CPI data will be released based on preliminary economic reports, analytical comments, and news. Expectations of strong or weak data can affect trading and volatility before the release.

A few days before the data release, markets often show some specific trends:

There is a decrease in liquidity, because traders may go bearish — avoid significant risks and postpone large trades until after the report is released. This often results in narrowed trading ranges.
If traders expect significant changes based on official comments or preliminary data, this may create a sideways (horizontal) channel. Also traders often use hedging more, which can lead to sharp price fluctuations within sideways ranges. For example, a few hours before the NFP release, EURUSD may start to move sideways (see the graph below) due to uncertainty about the data, especially if US economic data is contradictory.

MDP-6565_1_cover_1200x675_(1).png — EURUSD moves sideways before the data release

While the Japanese yen is often a safe-haven currency in times of uncertainty, USDJPY may strengthen slightly if traders expect robust NFP data.

As the graph below shows, stocks often become less liquid and the trading ranges become narrower before a release — investors are cautious and not too willing to take additional risks.

MDP-6565_1_cover_1200x675_(2).png — Stock trading ranges become narrower before the release

Not sure how it all ties together yet? Our trading basics course breaks down how market news translates into real price moves.

Asset behavior at the time of NFP and CPI release: typical market scenarios

At the time of NFP and CPI release the market often experiences strong price fluctuations. Reflect on the risks you might face when trading at this time, and what strategies to adopt.

Market reaction to positive NFP and CPI data

Positive NFP and CPI data show that the US economy is in good shape, which can lead to increased optimism in the markets:

The US dollar tends to strengthen. Markets expect the Fed to take more robust measures to control inflation, which leads to a rise in dollar assets.
In response to upbeat employment data, U.S. Treasury yields may rise as investors anticipate a Fed rate hike.
Positive NFP often boosts stocks and stock indices in the U.S.
Strong NFP data could cause gold prices to fall as rising rates make gold a less attractive non-return asset.

Market reaction to negative NFP and CPI data

When NFP or CPI data are worse than expected, it can signal economic weakness. The markets react accordingly:

Bond prices typically rise (and yields fall) as weak job data raises the prospect of rate cuts or sustained low rates. In March 2023, weaker NFP data triggered demand for Treasuries, driving 10-year yields lower as investors sought to protect their assets.
Stocks may decline initially due to fears of slowing corporate earnings and economic growth. However, expectations of lower interest rates can later support growth stocks. In mid-2020, job data was weaker than expected, which led to short-term declines but boosted tech stocks as the Fed adopted supportive policies.
As a safe-haven asset widely used for hedging, gold benefits from weak economic signals and potential dollar weakness.

How to trade on the NFP and CPI releases

When you deal with important news like unemployment data, placing pending and take-profit orders can be a wise tactic that minimizes risks and uses market news with maximum efficiency.

Suppose the current price of EURUSD is 1.18241. Five minutes before the news release, place two orders: a buy-stop (at 1.18341, 100 pips up), and a sell-stop (at 1.18141, 100 pips down).
Set the take-profit to 50-100 pips in each order. This way, you will lock in profits before a possible correction.
If one order triggers (for example, a buy-stop is opened) immediately remove the opposite order (in this case, your sell-stop) to avoid buying and selling the same currency pair simultaneously, which can lead to a lock.

Sudden changes: what are the possible consequences?

When NFP or CPI data differs significantly from forecasts, it signals unusual economic dynamics.

A sudden rise in job numbers could be telling of unexpected economic recovery, while a sharp decline might signal economic slowdown or external hits, such as a pandemic or geopolitical tensions.
A rapid inflation rise often reflects supply chain issues, rising commodity prices, or demand surges. Unexpected drops may signal deflationary pressures or weak consumer demand.

For example, in June 2020, NFP data showed that 2.5 million jobs were gained against expectations of massive unemployment due to the COVID-19 pandemic. This anomaly reflected a faster rebound in reopening industries. Two years later, in the summer of 2022 the CPI surge to 9.1% was driven by energy price spikes from geopolitical instability in Western Europe.

Trader strategies during sudden changes

When unexpected NFP or CPI data is released, you can employ the following strategies to capitalize on the volatility.

When trading forex, trade currency pairs (e.g. USDEUR) based on the direction of interest rate expectations. Strong NFP supports USD, while weak CPI weakens it. Use stop-loss and take-profit orders to manage risk during rapid fluctuations.
As for equities, focus on interest-sensitive sectors (tech for CPI data, consumer goods for NFP trends). A sharp CPI increase could favor value stocks over growth stocks because the discount rates are higher.Aim for changes in yields when trading bonds. Higher-than-expected CPI could result in rising Treasury yields.
Hedge using gold or oil. High inflation boosts gold, while weak CPI reduces its appeal.

Impact of NFP and CPI on central bank policies

Central bank policies depend on this data. High NFP is a sign of economic health, supporting rate hikes to manage overheating. On the other hand, low NFP indicates a downslide in the economy and signals that you can expect rate cuts. After a strong NFP in early 2023, the Fed maintained a hawkish approach and delayed rate cuts despite slowing GDP growth.

When inflation is high, the Fed tries to hike rates to control it (as in 2022). When CPI is low, there is a risk of deflation.

Summary

Trading on NFP and CPI releases is an excellent opportunity for experienced traders who know how to deal with high volatility and risk. This data gives a clear picture of the current state of the economy, and understanding how the markets will react to specific numbers is critical to successful trading. It is essential to prepare in advance, use pending orders to minimize risk, and be ready to respond quickly to market fluctuations. By following a strategy based on data analysis and proper positioning, you can effectively use news releases to profit.

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