US employment data was slightly weaker than expected, although the unemployment rate declined to an 8-month low.

US employment data was slightly weaker than expected, although the unemployment rate declined to an 8-month low.

The data triggered fresh reservations over the near-term US outlook. Overall risk appetite held steady amid expectations of strong fiscal and monetary support. Wall Street posted gains amid expectations of a large fiscal package with the S&P 500 index at record highs.

Despite higher bond yields, the dollar lost traction amid doubts over the US performance. The Euro regained ground with EUR/USD back above 1.2000. GBP/USD advanced, but Sterling overall was unable to make headway. Commodity currencies regained ground strongly as the US dollar dipped, but lost momentum on Monday.

The Euro edged higher into the New York open with selling pressure on the single currency easing, although underlying sentiment remained weaker. Overall Euro sentiment remained fragile given near-term coronavirus fears with the German lockdown likely to be extended for a further two weeks.

US non-farm payrolls increased 49,000 for January which was close to expectations, although the December reading was revised down to a decline of 227,000 compared with a fall of 140,000 reported originally. There was a decline in manufacturing jobs for the month with retail employment also declining while there was a much-reduced decline reported for the leisure sector.

The unemployment rate declined to an 8-month low of 6.3% from 6.7% as the participation rate edged lower. The data overall dampened confidence in the outlook, although markets were wary over potential distortions and there were expectations of recovery later this year.

The December trade deficit narrowed to $66.6bn from $69.0bn the previous month while the 2020 deficit hit a 12-year high of $679bn.

The dollar initially lost ground on the data and the Euro gradually regained some territory amid evidence that immediate selling pressure had eased. After a brief recovery, the dollar lost ground again into the European close. As commodity currencies posted a sharp recovery, EUR/USD advanced to near 1.2050.

CFTC data recorded a notable decline in long, non-commercial Euro positions to 137,000 contracts in the latest week from 163,000 previously and the lowest reading for over 2 months. Further dollar short covering would underpin the US currency, but the US currency was unable to regain ground on Monday.

German industrial production was unchanged for December compared with expectations of a 0.3% gain, but there was a slowdown in German coronavirus infections with EUR/USD around 1.2040.

The dollar lost ground after the US employment report, although overall moves were limited. The weaker than expected data hampered near-term confidence in the outlook, but also increased pressure for a more aggressive fiscal response. Long-term yields edged higher on the day which helped protect the US currency to some extent. From 11-week highs around 105.75, USD/JPY retreated to 105.40, although the yen was subdued on the crosses.

Former Treasury Secretary Summers warned over the risk of higher inflation if the $1.9trn fiscal package went ahead, but there was a sharp rejection of these concerns by current Secretary Yellen who again warned that the bigger threat came from high unemployment.

Given the increase in inflation focus, the latest consumer prices data is likely to be an important focus on Wednesday with markets watching trends in bond yields closely. US yields continued to push higher on Monday with the 10-year yield at 11-month highs which provided underlying US dollar support.

The yen edged lower as Japan’s Nikkei 225 index posted a 30-year high with USD/JPY at 105.50 while EUR/JPY posted a net gain to just above the 127.0 level.

The Halifax house price index declined 0.3% for January with the year-on-year increase slowing to 5.4% from 6.0%, reinforcing expectations that the market is cooling.

Bank of England Deputy Governor Broadbent stated that the bank is not more optimistic than 3 months ago in level terms with a steeper short-term downturn offset by a sharper recovery later in the year. He reiterated that the bank won’t even think of withdrawing support until there are clear signs of sustainable recovery and inflation.

Overall Sterling confidence remained strong amid optimism over the vaccination programme, although there were still reservations over trade difficulties.

GBP/USD moved back above 1.3700 following the US jobs data and closed very close to 32-month highs. There was, however, GBP/EUR reached highs near 1.1440.

CFTC data recorded a slight increase in long Sterling positions, although overall moves have remained limited over the past few weeks with little evidence of strong buying. Optimism over a global recovery continued to provide solid Sterling support on Monday with GBP/USD trading around 1.3730.

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