How to Trade US Average Hourly Earnings: A Comprehensive Guide
Introduction
US Average Hourly Earnings provides valuable insights into wage inflation, reflecting changes in workers’ income. This guide will share the exact strategy that professional traders use to take money from the 95% of losing retail traders. By following our step-by-step guide, you’ll learn how to level the playing field and effectively trade the Average Hourly Earnings report, a tier one event that often causes significant market movements.
Understanding US Average Hourly Earnings
Average Hourly Earnings, released monthly by the Bureau of Labor Statistics (BLS), measures the average income received per hour by workers, excluding bonuses and irregular payments. While it doesn’t provide the breadth of the Non-Farm Payrolls (NFP) report, it offers a detailed view of wage inflation trends crucial for economic analysis.
Why Average Hourly Earnings Matter
- Wage Inflation Insights: It gives detailed insights into underlying wage inflation trends, reflecting the overall health of the labor market.
- Influencing Policy: Average Hourly Earnings is closely watched by the Federal Reserve, significantly influencing monetary policy decisions.
- Complementary Data: It adds context and depth to major reports like NFP and CPI, helping traders form a more complete picture of economic conditions.
Why Average Hourly Earnings is a Tier One Event
- Central Focus: As a primary measure of wage inflation for the Federal Reserve, Average Hourly Earnings can have substantial implications for interest rate decisions, making it highly significant for traders.
- Immediate Impact: Despite reflecting past trends, its influence on monetary policy decisions means it can cause immediate and significant market reactions.
Difference Between Average Hourly Earnings and the Headline Number
- Average Hourly Earnings: This measures the average amount of income workers receive per hour in a given period, excluding bonuses and irregular payments. It reflects wage inflation and the purchasing power of consumers.
- Headline Number: The headline number in the NFP report typically refers to the total number of jobs added or lost in the economy.
Federal Reserve's Focus on Average Hourly Earnings
The Federal Reserve often emphasizes average hourly earnings within the broader NFP report. This focus gives average hourly earnings extra significance, sometimes even more than the headline employment number, as it directly impacts consumer spending and overall economic health.
Trading Strategy for Average Hourly Earnings
Step 1: Analyze Federal Reserve Priorities
The first step is to understand what data points the Federal Reserve is currently focused on. If the Fed is focused on wage inflation data, including Average Hourly Earnings, the data point will have a significant amount of volatility because the Fed is in some way basing its interest rate decisions on that data release. To quickly determine the Fed’s current focus, you can use our Professional Economic Calendar, which includes a fundamental guide. This resource helps traders stay updated on the data points that matter most to the Fed, providing a strategic advantage.
Step 2: Use High-Low Expectation Forecasts
Professional traders rely on high-low forecasts to gauge market expectations accurately. Here’s a more detailed look at why these forecasts are crucial:
- Institutional Forecasts: Professional economic calendars include high and low estimates from top institutions. This broader range of expectations offers a more comprehensive picture of potential outcomes.
- Market Shocks: When a report exceeds the high estimate or falls below the low estimate, it’s a huge shock to markets because no analyst expected it. Such deviations often result in sharp market movements.
- Lightning Bolt Feature: This tool immediately signals a deviation above the high or below the low of analyst expectations. When a deviation occurs, the lightning bolt feature alerts traders instantly, allowing them to act without delay. The quick reaction to unexpected data can be the difference between a profitable trade and a missed opportunity.
Understanding High-Low Forecasts
Economic forecasts are derived from surveys of credible institutions, each providing their best estimate on upcoming data points. Retail calendars typically present the median of these estimates, which can be misleading. The median forecast doesn’t reveal the full range of expectations and, therefore, doesn’t indicate how surprising an actual data release is compared to the extremes of analysts’ projections. In contrast, professional economic calendars include both high and low estimates. This additional information shows the analysts’ expectations at the extreme ends of their projections. Great trading opportunities arise when data releases fall outside these high and low estimates, creating market shocks that move prices significantly.
Step 3 - Choosing the Most Volatile Instrument to Trade
Using insights from institutional reports, traders can select the most responsive currency pairs. For example, if USD/CAD is particularly sensitive to economic data as outlined by the City Economic Surprise Index and the Canadian CPI report shows a significant deviation, this pair could be an ideal target for trading.
- City Economic Surprise Index: This report identifies currency pairs that react strongly to economic surprises. It highlights pairs that are sensitive to data deviations, helping traders focus on the most responsive markets.
- Risk-Reversal Report: This report shows market positioning, revealing a buildup of call or put options on certain currency pairs. Understanding these positions helps traders choose a pair that may have orders which are susceptible to getting liquidated upon the release of an economic data point.
- CFTC Report: This report details hedge funds' positions. If a lot of big players are long the EUR/USD but then data comes out in favor of the USD, some of those funds might have to unwind their positions, leading to an outsized move. Good thing you didn’t trade the GBP/USD.
Trade Execution Steps
- Confirm Fed Focus: Ensure the Federal Reserve is currently emphasizing wage inflation data. If wage inflation is a primary focus, the Average Hourly Earnings report will have a higher likelihood of moving the market. Remember, if the central bank is focused on the data point, it’s because they are using that data point to make a decision on rates. This is the reason data points that are focused on cause volatility. In addition, sometimes the central bank is focused on a data point inside a data point. For example, the Federal Reserve often calls out specific components within broader reports.
- Check Forecast Ranges: Before the data release, review the high and low forecast expectations for the event. Plan to trade only if the actual data significantly exceeds the high estimate or falls below the low estimate. This strategy ensures you act on genuinely surprising data and there will most likely be a follow-through reaction.
- Align Key Metrics: For a robust trade setup, ensure that average hourly earnings, the headline number, and the unemployment rate are aligned. This alignment increases the probability of a strong market reaction and a more predictable trading outcome.
- Monitor Revisions: Check for any conflicting revisions in the data, as these can alter the initial market reaction. Make sure the primary release and any revisions align to support your trade.
- Enter Trade Promptly: Once you confirm the deviation, act quickly to enter your trade. Enter within the first 30 seconds. Speed is crucial, as market reactions to significant data surprises happen rapidly.
- Set Stop and Take Profit:
- Stop-Loss: Place your stop-loss below the low of the initial spike candle to protect against adverse movements.
- Take Profit: Aim for 30-100 pips for tier one events like Average Hourly Earnings, adjusting based on market conditions and volatility.
Managing the Trade
- After the Initial Run: Look for a shallow pullback around a 23% Fibonacci retracement or near support/resistance levels. This initial pullback can provide an opportunity to enter the trade again after you’ve taken a few points off the table after your first entry.
- Break Even: Move your stop-loss to break even as soon as possible to protect your gains. Generally, the stronger the release, the shallower the pullback. The other reason for moving to BE is that the market should want to buy off your S&R level and continue to the highs of the one-minute candle and break. If that doesn’t happen, something could be off.
- Reentries: If your initial position is stopped out at break even, consider reentering at deeper retracements, such as the 38% or 50% Fibonacci levels. Use nearby support and resistance levels to guide your reentry points.
Conclusion
The US Average Hourly Earnings report is a tier one event that often leads to significant market movements. Understanding its nuances and using a professional trading strategy can help you capitalize on unexpected deviations. If you don’t have the tools mentioned above, try out our Professional Economic Calendar Package and use institutional tools to level the playing field. By following these steps, you’ll be well-prepared to trade the Average Hourly Earnings report effectively, leveraging the same strategies that professional traders use to profit from this critical economic data release.