Policymakers, as well as financial markets, pay especially close attention to labor market indicators during periods of economic uncertainty. The reason, in short, is that changes in labor market activity are thought to be useful predictors for changes in real gross domestic product (GDP), the broadest measure of economic activity. The main indicators of activity in the labor market include the civilian unemployment rate, nonfarm payroll employment, and average weekly hours, all of which are reported monthly in the Employment Situation from the Bureau of Labor Statistics (BLS).
Indeed, the release of the monthly employment report seemingly rivals the post-FOMC meeting press release as the single most anticipated economic event in the financial markets. Given its significance, therefore, it is probably not too surprising that economists and market participants try to anticipate changes in this and other labor market indicators. The report measures the total number of people currently unemployed who are eligible to receive unemployment insurance benefits.
In relation to financial markets and particularly Forex market, we have seen that after Unemployment Claims’ announcement, the currency pair EUR/USD is affected in a particular pattern. A historical analysis during 3 months shows us that the influence of the Unemployment Claims moved the EUR/USD in an average of 400 pips each time.
The effect of the announcement would influence the market in two ways:
· When the announcement is higher than expected, the currency pair might react with an uptrend.
· When the announcement is lower than expected, it would create a downtrend.
Looking at 5 minutes timeframe, we set a 5 periods RSI at close with 30, 50, and 70 levels, which can give us a confirmation of the signal when the trend changes its direction. However, as most trend indicators this can only show us when the trend cross a level which not always takes place. We must wait for a few minutes, maybe a couple of candles, before taking a position. That way the target must be around an average of 200.
In conclusion, we fix our entry point depending of the candles formation. We will enter when there are two candles formation in the same direction with a RSI or MACD cross confirmation. We then set a target depending on the amount of pips left to trade out of the 400 average. We can also use the Traling Stop algorithm in Metatrader 4 settings if we see a longer influence of the fundamental.
We present a brief review of the Unemployment Claims weekly labor market data and its effect over EUR/USD currency pair. We then examine whether our forex strategy is useful for predicting the behavior of the market in this particular scenario.
Historical Analysis
12th June 2008
We got four fundamental releases affecting the dollar at the same time. Together these fundamentals moved the EUR/USD for about 688 pips in only two hours. In this case, the best decision is to wait because of the heavyweight of the fundamentals. However, we could use the candle confirmation and set a target of 300 pips.
19th June 2008
The result in the announcement was higher than expected creating and uptrend that reach 432 pips. Within this strategy we wait until the market moves and given the candles formations we should entry in the same direction that the candles shows. In this case the entry point is formed in the second candle. At this point we are losing the initial 150 pips rally but it would be safer. As we know the pair will move 400 pips in average, we can set a take profit for the next 250 pips above that level and 250 pips below for the stop lost.
26th June 2008
The release was lower than the forecast and the currency pair goes down as expected. The whole rally was for 300 pips but as we wait for the second candle after the release we could only reached 210 pips.
03th July 2008
The release shaped a downtrend moving the currency pair up to 1500 pips. However, the downtrend is motivated for three more fundamental releases that day. We went for the 400 pips average and we reached 200.
10th July 2008
An uptrend was created this time as the announcement turns out higher than the forecast. The pair moved 900 pips and our confirmation in the second candle left us with 200 pips to trade.
17th July 2008
As a same result from the week before was announced we wait for the candles formation and RSI was pretty accurate, leading us to more than 200 pips.
24th July 2008
The release is lower than expected and the price actually dropped 250 pips. We wait for the second candle formation and we set a target of 200 pips.
31th July 2008
As the result was higher than the expected we wait for the candle formation and with the 50 RSI we confirm the uptrend patern. Using the Traling Stop option in our MT4 we move our take profit following the trend, that way we could reach the 900 pips reaction.
07th August 2008
As the announcement was lower than expected a downtrend was created. We wait for candles formation after the RIS cross and we entry for 200 pips.
14th August 2008
We acted carefully this time as we were expecting for the pair to form a downtrend because the release was lower than the forecast, but the next two candles after the release were bearish which it’s a signal of doubt and we decided not to take a position. We use RSI and we try some other indicator to confirm the signal. However, we wait for the next 20 minutes and the signal was given for bullish candles, then we set a target of 200 pips.
21th August 2008
The price rose this time and when candles and the RSI cross we set a target of 300 pips. We manage to reach 400 pips trailing our position as we identify a stronger uptrend.
