Headline US jobs data was notably stronger than expected with an 850,000 increase in payrolls.

Headline US jobs data was notably stronger than expected with an 850,000 increase in payrolls, although the overall data was mixed.

US bond yields edged lower after the data which had an impact on wider markets. Optimism over low global interest rates underpinned risk appetite. Wall Street equities posted strong gains, although markets were mixed in Asia.

The dollar briefly strengthened after the jobs data before fading amid expectations of a cautious Fed and position adjustment. EUR/USD made only a tentative recovery to just above 1.1850 with under-performance on the crosses. Sterling was protected by firm risk appetite with GBP/USD back above 1.3800. Commodity currencies rallied strongly as the US currency faded and equities made gains.

Headline US jobs data was stronger than expected, but the underlying details were mixed. Non-farm payrolls increased 850,000 for June after an upwardly-revised 583,000 increase the previous month and well above consensus forecasts of around 700,000. There was only a small increase in manufacturing jobs and construction employment declined on the month. There was a strong increase of over 340,000 in the leisure and hospitality sector while there was a technical increase of close to 190,000 in government jobs given distortions from coronavirus developments with lower than usual drop in teaching jobs.

Unemployment edged higher to 5.9% from 5.8% and above market expectations of 5.7% with an unchanged participation rate and the household survey recorded a small decline in employment on the month which was in sharp contrast to the payrolls data and potentially signalling an increase in the labour force.

Average hourly earnings increased 0.3% on the month, slightly below expectations, with annual growth of 3.6% from 1.9% previously.

After a brief uptick, the US currency edged lower amid doubts that underlying data was strong enough to prompt an early interest rate increase from the Federal Reserve. Markets were more confident that strong monetary stimulus would remain in place for longer. Dollar selling gathered pace later in the day with EUR/USD recovering to 1.1865, although there were stronger recoveries for commodity currencies with the Euro under-performing on the main crosses.

CFTC data recorded a further small decline in long Euro positions for the latest week with overall dollar short positions at 2-month lows.

Trading conditions are likely to be subdued later on Monday with US markets closed for the Independence Day holiday.

ECB member Schnabel stated that an overshoot in inflation is necessary and proportionate to escape from low inflation, but fellow member Knot was more concerned over inflation and that the asset-purchase programme should be wound down from March. The Euro was unable to make further headway and EUR/USD traded just above 1.1850.

Despite a brief initial dip, US Treasuries strengthened during New York trading on Friday which put downward pressure on yields with the 10-year yield below 1.45%. The yen was broadly resilient despite stronger equity markets and USD/JPY retreated to lows just below 111.00.

There are unlikely to be comments from Fed speakers on Monday, but comments later in the week and the Fed minutes will be watched closely.

CFTC data recorded an increase in short yen contracts to near 70,000 in the latest week, the largest short position for over two years. The substantial short position will maintain the scope for a sharp correction if there is any shift in sentiment, but risk appetite held relatively firm on Monday.

China’s Caixin PMI services index slowed sharply to a 14-month low of 50.3 from 55.1 previously and well below expectations of 55.7.  There was also an easing of upward pressure on costs in the data. The dollar resisted further selling pressure and USD/JPY traded around 111.15 in early Europe with EUR/JPY around 131.75.

Sterling was unable to make any headway ahead of Friday’s New York open and GBP/USD dipped to 10-week lows below 1.3750. There was a net reversal following the US jobs data and a move back above 1.3800 as the dollar lost ground. Sterling was underpinned by robust risk appetite following the payrolls report with optimism that global interest rates would remain low which helped underpin confidence in growth-orientated currencies and GBP/EUR edged higher.

CFTC data recorded a marginal decline in long non-commercial Sterling positions for the latest week which suggested that there was a lack of conviction among hedge funds. Prime Minister Johnson will make a statement on Monday and indications from the government suggest that the final relaxation of coronavirus restrictions will go ahead in England as planned on July 19th which will underpin business confidence but there are market reservations over the further increase in new infections.

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