The US employment data was strong and beat market expectations with a non-farm payrolls increase of 943,000.

The US employment data was strong and beat market expectations with a non-farm payrolls increase of 943,000, the strongest increase for 10 months. The data triggered stronger expectations of a near-term Fed tapering announcement. Overall volatility increased amid low liquidity in global markets. US bond yields moved sharply higher with the 10-year yield above 1.30%.

Wall Street equities were resilient, but edged lower. Asian equities held tentative gains on Monday despite reservations over Chinese coronavirus trends.

The dollar posted sharp gains to 2-week highs following the jobs data. EUR/USD retreated to lows near 1.1750 before stabilising. Sterling overall held firm with EUR/GBP testing 2021 lows before a slight recovery.

Commodity currencies were hit by dollar strength. Dollar strength and concerns over Chinese trends hurt oil prices with sustained losses.

German industrial production data was below market expectations with a 1.3% decline for June after a revised 0.8% contraction previously which hampered the Euro.

US non-farm payrolls increased 943,000 for July compared with consensus forecasts of an increase of around 870,000 while the June increase was revised up to 938,000 from the first estimate of 850,000. Private payrolls increased 703,000 on the month with another substantial increase in government jobs.

Manufacturing jobs increased 27,000 on the month while there was a further very strong increase of 380,000 in the leisure sector as venues re-opened.

The unemployment rate declined sharply to a 16-month low of 5.4% from 5.9% previously with the household survey recording an increase of over 1.0 million in the number of people in employment. Average hourly earnings increased 0.4% on the month with an annual increase of 4.0% from 3.7% previously.

The strong labour-market data reinforced expectations that the Federal Reserve would make a move to taper bond purchases relatively quickly, especially as Fed officials have reiterated that strong gains in employment will be a crucial metric for policy decisions.

The US dollar posted solid gains in an immediate response to the data and secured further net gains into the New York close with the dollar index at 2-week highs. Overall, EUR/USD retreated to lows just above 1.1750 late in the European session before stabilising.

US consumer credit increased at a record rate for June, reinforcing expectations of strong domestic demand. Comments from Fed officials will continue to be monitored closely in the short term with Chair Powell’s Jackson Hole speech a key event later in August.

CFTC data recorded no change in the Euro positioning in the latest week while there was a small net reduction in the overall long dollar position. The US currency maintained a strong position on Monday, although EUR/USD did find some support below 1.1750 after ECB Weidman stated that the bank will tighten policy if necessary.

US Treasuries dipped sharply after the stronger than expected US jobs data with the 10-year yield edging above the 1.30% level. Equity futures were resilient despite the increase in yields and USD/JPY strengthened to highs above 110.30.

CFTC data recorded a small decline in short yen positions in the latest week, but there will still be scope for sharp position adjustment if dollar sentiment dips again.

The latest Chinese trade data recorded a slowdown in export growth to 19.3% in the year to July, below consensus forecasts of close to 21% with import growth also slowing. There were concerns over near-term data vulnerability, especially with increasing domestic coronavirus cases and tighter travel restrictions.

Chinese inflation data was slightly above consensus forecasts while equity markets posted tentative gains in Asia with USD/JPY around 110.20 and EUR/JPY around 129.60.

In comments on Friday, Bank of England Deputy Governor Broadbent stated that the bank would be watching very closely possible second-round effects on wages from the latest increase in inflation and considered that there was greater uncertainty in this area as opposed to upward pressure on costs associated with goods and trade. He repeated comments in Thursday’s MPC statement that a modest tightening in policy was likely over the medium term.

The overall markets impact was limited with little in the way of fresh developments. Sterling dipped sharply against the dollar following the US jobs report and GBP/USD hit lows near 1.3860 while GBP/EUR remained strong with a test of the April 2021 highs at 1.1805.

CFTC data recorded a net reduction in short, non-commercial Sterling positions to near zero in the latest week which suggests that hedge funds have pulled back from selling the UK currency. There were media reports of tensions between Prime Minster Johnson and Chancellor Sunak with markets monitoring coronavirus trends closely.

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