The US employment report was stronger than April, but payroll gains were again below market expectations.

The US employment report was stronger than April, but payroll gains were again below market expectations. US bond yields moved lower following the data with the 10-year yield below 1.60%. Wall Street equities posted gains to near record highs on expectations that Fed policy would remain very accommodative.

The dollar retreated sharply following the data, although there was no follow-through selling on Monday. EUR/USD was unable to regain 1.2200 amid underlying indecision. GBP/USD posted net gains but was again blocked at 1.4200 and dipped lower on Monday. Commodity currencies rallied after the US data, although momentum was lacking. The Canadian dollar was also hampered by a weaker than expected domestic jobs report.

Tight ranges prevailed ahead of Friday’s New York open with inevitable caution ahead of the US employment data with the dollar maintaining a slightly firmer tone.

US non-farm payrolls increased 559,000 for May following a revised increase of 278,000 the previous month, but this was still below consensus forecasts of a 650,000 increase for the month. Private payrolls increased 492,000 for the month after a 219,000 increase the previous month.

Manufacturing jobs increased 23,000 on the month, but there was a 20,000 decline in construction jobs for May while retail jobs also declined for May.

The unemployment rate declined to 5.8% from 6.1% and slightly below consensus forecasts of 5.9% with the labour-market survey recording a solid employment gain.

Average earnings increased 0.5% on the month with an annual increase of 2.0% from 0.4% previously which maintained some concerns over inflation developments.

The dollar dipped sharply following the data with an assumption that the data was no strong enough to trigger a shift in Federal Reserve stance. In this context, there were expectations that the yield structure would continue to undermine US currency support over the next few months with EUR/USD peaking just above 1.2180.

CFTC data recorded an increase in long Euro positions to 109,000 in the latest week from 104,000 previously which will maintain the potential for sharp position adjustment if there is a shift in Fed policy or another catalyst, but markets assumed there was no immediate catalyst for a change which undermined US support.

There is likely to be some caution ahead of this Thursday’s ECB policy meeting with the US also releasing its latest trade data. The dollar overall was unable to secure a significant recovery on Monday with EUR/USD unable to regain the 1.2180 level in Asia and edging lower to near 1.2150 at the European open after slightly weaker than expected German industrial orders data.

US Treasuries rallied following the US employment data with a decline in the 10-year bond yield to below 1.60% which sapped dollar support. There was an immediate USD/JPY break below the 110.00 level which triggered further losses and a retreat to near 109.50.

The US dollar was unable to recover ground as yields remained at lower levels later in the session which continued to undermine underlying US currency support.

There should be no further comments on monetary policy from Federal Reserve officials ahead of the June 16th policy meeting. In comments over the weekend, Treasury Secretary Yellen stated that higher interest rates would be a net plus for society and the Federal Reserve while monetary policy can handle inflation risks.

Overall yen sentiment remained weak with weak domestic wages growth limiting the scope for increased spending. Chinese export growth in the latest trade data was slightly lower than expected which dampened risk appetite to some extent, although overall moves were limited. The dollar overall was unable to make headway, although there was caution over further selling. USD/JPY traded around 109.40 in early Europe as the yen was resilient on the crosses with EUR/JPY just above 133.0.

The UK construction PMI index strengthened to 64.2 for May from 61.6 the previous month and the strongest reading since September 2014. New orders increased at the fastest pace on record while cost inflation also hit a record high while there was a further strong increase in supplier delivery times as supply-side issues continued.

Sterling edged higher amid underlying optimism over the recovery outlook. The UK currency also jumped higher against the dollar after the US employment data, but there was further GBP/USD resistance on approach to 1.4200 and there was a retreat to 1.4160 at the US close while GBP/EUR pared losses to trade around 1.1630.

CFTC data recorded a significant decline in long, non-commercial Sterling positions to 24,000 from 31,000 previously, reversing the gains seen previously. The data suggested that hedge funds were happy to trim long positions when the currency approached 3-year highs against the US currency.

Markets continued to monitor developments surrounding the Delta variant in the UK as the number of infections continued to increase, but hospitalisation rates held at low levels. Sterling edged lower on Monday as GBP/USD traded below 1.4150 with EUR/GBP just above the 1.1630.

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