NFP Friday: How past data releases have defied economic theory and impacted EUR/USD exchange rate

Traders are bracing themselves for NFP Friday once again, as economists anticipate a deceleration in job growth from 236K to 190K, an increase in the unemployment rate from 3.5% to 3.6%, and unchanged wage growth at 4.2% annually. The report will be published at 12:30 GMT on May 5, 2023. 

Examining the impact of past NFP data releases on EUR/USD, we can see that over the last 12 months, the exchange rate has risen in the four hours following better-than-expected data, indicating that the US economy created more jobs than anticipated.  

Conversely, when NFP data was lower than expected, the EUR/USD exchange rate declined. 

This trend contradicts economic theory, as better-than-expected US data should boost the US Dollar. However, it's important to note that over the last 12 months, economists and investors have predicted a global recession due to the aggressive rate hikes by central banks worldwide. 

My rationale behind the price action is that better-than-expected NFP data has lowered demand for the US as a haven. The idea is supported by the strong correlation between the EUR/USD and stock market indices. In October 2022, the EUR/USD reached its lowest point at 0.9538, and the S&P 500 hit its lowest point in the same month. Since then, the EUR/USD has risen by 15%, while the S&P 500 has gained 16.29%. For tomorrow’s NFP it is therefore expected the correlation to prevail i.e., better than expected data should support EUR/USD and vice versa.   

EUR/USD trend remains upwards  

As we headed into the NFPs, the EUR/USD exchange rate was upward. The price was supported by a trend line, as seen in the ThinkTrader chart below, and the trend would remain bullish above the April 17 low of 1.0909. Given the data above, a very weak NFP figure would be needed to end the uptrend. If the price slides below 1.0909, traders might target the next major low, the March 24 low of 1.0714.