US employment data was mixed with a sharp drop in unemployment, but a slightly smaller than expected increase in payrolls.

US employment data was mixed with a sharp drop in unemployment, but a slightly smaller than expected increase in payrolls. The dollar made net gains following the data but failed to sustain the gains amid underlying negative US sentiment.

EUR/USD again found support below 1.1800. Sterling was undermined on Monday by a sharp increase in Brexit trade tensions. Commodity currencies dipped after the US jobs data before recovering sharply to trade mixed.

US non-farm payrolls increased 1.37mn for August from a revised 1.73mn the previous month and slightly below consensus forecasts of 1.40mn. The increase in manufacturing jobs was held to 29,000, but there was a strong increase in retail jobs and further increase in hospitality. There was a big boost in government jobs of over 340,000 as payrolls were increased on a temporary basis to manage this year’s census.

The unemployment rate declined to a 5-month low of 8.4% from 10.2% and well below expectations of 9.8% as the household survey recorded a sharp increase in employment. Average hourly earnings increased 4.7% in the year, unchanged from the previous reading.

Although the unemployment rate declined sharply, there were concerns over underlying employment trends as the increase in private payrolls slowed. There was also a further sharp increase in the number of long-term unemployed which will increase concerns over longer-term economic scarring.

There was choppy trading following the release with the dollar initially making net gains, although EUR/USD again found support below the 1.1800 level. The US currency gradually lost ground amid underlying negative sentiment and the lack of yield support with expectations of medium-term losses.

CFTC data recorded a decline in long Euro positions in the latest week, although the total was still close to 200,000 contracts, maintaining the risk of a further correction.

The ECB will be a key focus this week while market conditions will be subdued on Monday given that US markets will be closed with EUR/USD around 1.1830.

The US equity futures failed to gain support from the labour-market data and Wall Street indices moved sharply lower at the market open. In this environment, the yen gain renewed defensive support and the dollar was unable to make significant headway against the Japanese currency.

Boston Fed President Rosengren stated that the market had got the message that interest rates in the US would not be increasing anytime soon and Chair Powell reiterated that case for low interest rates in the years ahead. There should be no comments this week with a blackout in force ahead of the September 16th meeting.

USD/JPY settled around 106.25 as US yields declined. Chinese trade data was mixed as exports advanced 9.5% in the year to August in yuan terms, but there was a 2.1% decline in imports compared with expectations of a slight increase which triggered some reservations over Chinese domestic demand.

Asian equities overall moved lower amid reservations over risk conditions with USD/JPY little changed around 106.25 amid fragile US sentiment.

The UK PMI construction index declined to 54.6 for August from 58.1 previously and well below consensus forecasts of 58.5. Although the sector remained in expansion territory, there was a net slowdown in growth with activity hampered by underlying uncertainty.

Bank of England MPC member Saunders noted that the UK economic recovery had been stronger than expected in May, but the window of favourable conditions was now fading. He also commented that the bank needed to act against downside risks and he expected a further increase in quantitative easing would be needed.

The weaker than expected data and cautious remarks from Saunders put Sterling on the defensive into the New York open.

GBP/USD dipped below 1.32 after the US employment data, but gradually regained ground amid independent support and US losses and pushed to highs around 1.3280.

Chief Negotiator Frost stated that the UK would negotiate constructively, but the EU stance may limit progress that can be made and also warned that the UK was not afraid to walk away from talks. There were also reports of new UK legislation which would over-ride the withdrawal agreement on Northern Ireland and increase tensions with the EU sharply. Prime Minister Johnson also stated that a deal was needed by October 15th to ensure ratification and both sides should move on if there is no agreement by then. Talks will resume on Tuesday.

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