US July Nonfarm Payrolls Preview: Analyzing gold's reaction to NFP surprises

Historically, how impactful has the US jobs report been on gold’s valuation? In this article, we present results from a study in which we analyzed the XAUUSD pair's reaction to the previous 24 NFP prints*.

We present our findings as the US Bureau of Labor Statistics (BLS) gets ready to release the July jobs report on Friday, August 5. Expectations are for a 250,000 rise in Nonfarm Payrolls following the 372,000 increase in June.

*We omitted the NFP data for March 2021, which was published on the first Friday of April, due to lack of volatility amid Easter Friday.

Methodology

We plotted gold price’s reaction to the NFP release at 15 minutes, one hour and four hours intervals after the release. Then, we compared the gold price reaction to the deviation between the actual NFP release result and the expected result. 

We used the FXStreet Economic Calendar for data on deviation as it assigns a deviation point to each macroeconomic data release to show how big the divergence was between the actual print and the market consensus. For instance, the August (2021) NFP data missed the market expectation of 750,000 by a wide margin and the deviation was -1.49. On the other hand, February’s (2021) NFP print of 536,000 against the market expectation of 182,000 was a positive surprise with the deviation posting 1.76 for that particular release. A better-than-expected NFP print is seen as a USD-positive development and vice versa.

Finally, we calculated the correlation coefficient (r) to figure out at which time frame gold had the strongest correlation with an NFP surprise. When r approaches -1, it suggests there is a significant negative correlation, while a significant positive correlation is identified when r moves toward 1. Since gold is defined as XAU/USD, an upbeat NFP reading should cause it to edge lower and point to a negative correlation.

Results

There were 12 negative and 12 positive NFP surprises in the previous 24 releases, excluding data for March 2021. On average, the deviation was -0.86 on disappointing prints and 0.59 on strong figures. 15 minutes after the release, gold moved up by $3.97 on average if the NFP reading fell short of market consensus. On the flip side, gold declined by $1.96 on average on positive surprises. This finding suggests that investors’ immediate reaction is likely to be more significant to a disappointing print.

However, the correlation coefficients we calculated for the different time frames mentioned above don’t even come close to being significant. The strongest negative correlation is seen 15 minutes after the releases with the r standing at -0.5. One hour after the release, the correlation weakens with the r rising to -0.31 and there is virtually no correlation to speak of four hours after the release with the r approaching 0.

Several factors could be coming into play to weaken gold’s correlation with NFP surprises. A few hours after the NFP release on Friday, investors could look to book their profits toward the London fix, causing gold to reverse its direction after the initial reaction. Additionally, FOMC policymakers made it clear that they will remain focused on taming inflation and that they are not yet concerned about the labour market, possibly causing the market reaction to the headline NFP to remain short-lived.

It's worth noting, however, that the Employment Index of the ISM Manufacturing and Services PMI reports both stayed below 50 in July, pointing to a loss of momentum in the labor market growth. Additionally, weekly Initial Jobless Claims have been rising steadily since early June. Hence, a large surprise in the headline NFP figure could trigger a bigger-than-usual reaction as it could have a significant impact on the market pricing of the Fed's rate outlook.