The financial markets are often severely impacted by statistics released by government and non-government organizations and events that offer an insight into the health or weakness of a given economy.
In this article, we will examine how traders can take advantage of the fluctuations in foreign currency exchange rates caused by the release of pertinent economic information in order to invest in a forex binary option that expires in-the-money.
Major economic events
During any given week, there are dozens and dozens of economic indicators that are released that may affect the way foreign currencies are traded.
In the US, there are several major economic indicators that often affect the way the US dollar is traded including nonfarm payroll employment numbers, Federal Reserve statements and actions, and the US balance of trade.
In this article, we will examine how the nonfarm payrolls reading can influence the strength of the US dollar and how a trader can use a binary option investment to capitalize on the market fluctuations that the report often causes.
Nonfarm payroll employment
The nonfarm payroll employment is one of the most important indicators of the US labor market which is released by the US Bureau of Labor Statistics and measures the change in the number of employed people in non-farming sectors in the previous month. It is typically released on the first Friday of the month and provides statistics for the previous month.
The nonfarm payroll reading is usually between +10,000 to +250,000 during “non-recession” periods and represents the number of jobs gained or lost in the nonfarm sectors of the US economy over the last month.
A higher than expected nonfarm payrolls reading could be a sign of strength for the US dollar since it would mean that more jobs than expected are being created in the US economy. A lower than expected reading could be a sign of weakness for the US dollar since it would mean that fewer nonfarm jobs are being created than expected.
Given the enormous impact the nonfarm payrolls report can have on the trading of the US dollar, the release of this statistic may in some cases present a prime opportunity for an investment in a EUR/USD forex binary option.
The 5-minute EUR/USD forex chart below illustrates the release of the most recent nonfarm payrolls on July 8 at 13:30 GMT. The nonfarm payroll reading came out at 18K (jobs created) while the forecast was for 89K – meaning that the amount of jobs created in the nonfarm sectors of the US economy was significantly lower than expected. This caused the dollar to immediately begin decreasing in value vis-a-vis the euro, as is clearly visible on chart.
Click on chart to expand
In this case, an investment on a call EUR/USD binary option at 13:30 GMT with an expiry of 14:00 GMT would have taken advantage of the US dollar’s weakness following the release of the negative nonfarm payrolls reading and would have finished in-the-money yielding up to an 85% return on investment.
If you’re still skeptical as to the likelihood that the change in the EUR/USD forex chart was a result of the nonfarm payrolls data, let’s have a look at another major US dollar exchange rate in order to see if or how it was impacted following the release.
Below you will find a 15-minute chart for the GBP/USD forex rate. As you can clearly see, immediately following the release of the negative nonfarm payrolls data, the US dollar began decreasing in value vis-a-vis the Pound.
As such, an investment in a call GBP/USD binary option at or around 13:30 GMT with a one hour expiry would have finished in-the-money netting up at an 85% return on investment.
Now, it may seem easy to look at past forex charts and see when and where it would have been possible to profit with a forex binary option – as the saying goes: “hindsight is 20/20”; However, the truth of the matter is that the nonfarm payrolls reading can provide a great opportunity to profit with a forex binary option investment if one is able to discern how the reading is likely to turn out.
As stated above, the idea is to figure out whether the nonfarm payrolls data has a higher probability of being positive (more jobs created than expected) or negative (less jobs created than expected) and invest accordingly.
If you think the nonfarm payrolls will come out less than expected, then it would be prudent to invest in a call EUR/USD or GBP/USD binary option at or around the release of the nonfarm payroll data.
If, on the other hand, you believe that the nonfarm payrolls will come out higher than expected, it may be prudent to invest in a put EUR/USD or GBP/USD binary option at or around the release of the data.
Remember, the financial markets are constantly being influenced by myriad factors so there is no guarantee that the US dollar will only respond to the data from the nonfarm payrolls when they are released.
However, judging from past nonfarm payrolls releases such as the one above, there may be an excellent opportunity to profit with binary options during the release of this very sensitive economic data.