US May Nonfarm Payrolls Preview: Analyzing Gold price 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 XAU/USD pair's reaction to the previous 35 NFP prints*.

We present our findings as the United States Bureau of Labor Statistics (BLS) gets ready to release the May employment report on Friday. Expectations are for a 130,000 rise in Nonfarm Payrolls following the stronger-than-forecast 177,000 increase recorded in April.

*We omitted the NFP data for March 2023, which was published on the first Friday of April, due to lack of volatility amid Easter Friday.

Methodology

We plotted the gold's price reaction to the NFP print at 15-minute, one-hour, and four-hour intervals after the release. Then, we compared this reaction to the deviation between the actual NFP release result and the expected figure.

We used the FXStreet Economic Calendar 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 April (2024) NFP data missed the market expectation of 243,000 by a wide margin and the deviation was -1.28. On the other hand, September's (2023) NFP print of 246,000 against the market expectation of 170,000 was a positive surprise with the deviation posting 2.66 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 determine the time frame in which 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 9 negative and 26 positive NFP surprises in the previous 35 releases, excluding data for March 2023. On average, the deviation was -0.58 on disappointing prints and 1.35 on strong figures. Fifteen minutes after the release, gold moved up by $7.2 on average if the NFP reading fell short of market consensus. On the flip side, gold declined by $5.2 on average on positive surprises. This finding suggests that investors’ immediate reaction is likely to be more significant to a weaker-than-forecast print.

The correlation coefficients we calculated for the different time frames mentioned above are not close enough to -1 to be considered significant. The strongest negative correlation is seen in 15-minutes and one-hour, with r standing at around -0.57 and -0.55, respectively. Four hours after the release, r edges higher toward -0.43.

Several factors could be coming into play to slightly weaken gold’s inverse 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.

More importantly, underlying details of the jobs report, such as wage inflation, as measured by the Average Hourly Earnings and the Labor Force Participation rate, could be having an impact on market reaction. The US Federal Reserve (Fed) clings to its data-dependent approach and the headline NFP print, combined with these other data, could drive the market pricing of the Fed's next policy action.

Additionally, revisions to previous readings could distort the impact of the recently released data. For instance, NFP in February 2024 rose by 275,000 and surpassed the market expectation of 200,000 by a wide margin. However, January's increase of 335,000 was revised lower to 229,000, not allowing the USD to benefit from the upbeat February print.