Headline US jobs data was much weaker than expected in August.

Headline US jobs data was much weaker than expected with the August payrolls increase held to 235,000, although overall employment data was mixed. Treasuries failed to make headway despite the payrolls data with bond yields edging higher.

Wall Street equities edged lower, although selling was limited. Global equities were mixed with net gains for regional markets in Asia.

Overall risk appetite was relatively steady amid expectations of low interest rates. The dollar dipped sharply on the jobs data but recovered from 1-month lows and extended the tentative recovery on Monday.

EUR/USD was unable to hold above 1.1900 and retreated to around 1.1870. Sterling posted limited net gains, but GBP/USD failed to attack 1.3900 and lost ground on Monday. Commodity currency gains seen after the jobs data also faded as commodity prices retreated.

The Euro-zone PMI services index was revised down to 59.0 from the flash reading of 59.7 with the Spanish and Italian indices both weaker than consensus forecasts.

US non-farm payrolls increased 235,000 for August, substantially below consensus forecasts of around 750,000 although the July increase was revised higher to 1.05mn. There was an increase in manufacturing jobs for the month, but employment in the construction and retail sectors both declined and there was no net increase in the leisure sector. There was also a small decline in government jobs after big increases for the previous two months.

The unemployment rate dipped to 5.2% from 5.4%, in line with market expectations, while the household survey reported a monthly employment increase of over 500,000. Average earnings increased 0.6% on the month with the annual increase at 4.3% from a revised 4.1% previously, maintaining expectations of higher wages.

Nevertheless, the headline payrolls data dampened any expectations that the Federal Reserve would taper bond purchases at the September policy meeting.

The dollar dipped sharply on the headline payrolls release with EUR/USD breaking to 1-month highs above the 1.1900 level, although the US currency recovered quickly.

The US ISM non-manufacturing index declined to 61.7 for August from 64.1 the previous month, but slightly above market expectations. There was a slowdown in business activity, but new orders continued to increase at a strong rate while employment posted a measured gain. There was a slight slowdown in the rate of prices growth for the month. The dollar was subjected to further choppy trading into the European close with EUR/USD settling around 1.1880.

CFTC data recorded a further decline in long Euro positions to 10,500 in the latest week from over 24,500 previously and the smallest long position since March 2020. The dollar, however, posted limited gains on Monday with a further recovery from 1-month lows with EUR/USD around 1.1870 amid expectations that the US holiday would dampen market activity.

US Treasuries briefly gained ground after the US employment report, but there was a quick reversal and yields moved higher with the 10-year yield increasing slightly to around 1.33% after the Wall Street open. Equities edged lower following the US data. The dollar dipped lower following the data and rallied attracted selling interest as the yen gained some ground on the crosses.  Overall, USD/JPY retreated to lows around 109.60 before securing a marginal correction.

CFTC data recorded a small decline in short yen positions of over 3,000 contracts to just above 63,000, but there will still be the potential for sharp position adjustment and yen gains if there is a sustained dip in risk appetite.

Sources indicated that Chinese state banks had bought dollars late last week to curb yuan gains which also helped underpin dollar sentiment in Asia on Monday.

Markets will continue to monitor comments from Federal Reserve officials in the short term for evidence on whether the jobs report has had a significant impact on their policy expectations. Overall, USD/JPY settled around 109.80 in early Europe with EUR/JPY around 130.30 as the yen resisted aggressive selling.

There were no significant domestic releases on Friday as global developments again dominated trading. Sterling gained an element of support from expectations that global central banks would maintain a very accommodative policy stance which could give the UK currency a relative advantage if the Bank of England edges towards policy tightening.

CFTC data recorded a reduction in the short Sterling position to just under 15,000 contracts in the latest week from 16,700 previously which suggests that selling pressure had eased, but there was still little evidence of strong underlying support for the currency.

There was further speculation that Prime Minister Johnson would push ahead with a tax increase to fund changes to social care changes. GBP/USD edged back below 1.3850 while GBP/EUR edged higher to 1.1675 in tentative conditions with risk conditions overall little changed at the European open.

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