EUR / USD
The final Euro-zone PMI services index was revised down to 56.1 from the flash reading of 56.3 and the Euro was subjected to renewed selling ahead of Friday’s New York open as it failed to hold above 1.0750 and retreated towards 1.0720 amid a firm dollar tone.
US non-farm payrolls increased 390,000 for May after a revised increase of 436,000 the previous month and above consensus forecasts of 325,000. The manufacturing employment increase was held to 18,000 while there was a 36,000 increase in construction jobs. There was, however, a sharp decline in retail jobs of 60,000 for the month which will maintain some concerns over the spending outlook.
The unemployment rate was held at 3.6% and marginally above expectations of 3.5% as the participation rate edged higher and the household survey recorded an employment increase of over 320,000 for the month. Average hourly earnings increased 0.3% for May and slightly below market expectations with the year-on-year retreat edging lower to 5.2% from 5.5% which met consensus forecasts. There was choppy dollar trading after the US data with the dollar unable to sustain gains.
The ISM non-manufacturing index retreated to 55.9 for May from 57.1 and slightly below expectations of 56.4. Business activity growth slowed, but there was a stronger rate of growth in new orders for the month. The employment index edged back into positive territory, but there were further uncertainties whether this reflected weaker demand or on-going supply-side difficulties. There was a slight easing of price pressure for the month with the prices index at a 4-month low.
The dollar settled around 1.0720 as the slide in equities limited Euro support with a July ECB rate hike priced in.
CFTC data recorded a further increase in long Euro positions to over 52,000 contracts for the latest week from just below 39,000 previously which suggests limited net scope for further Euro gains. The Euro traded marginally higher at 1.0725 on Monday as global risk appetite stabilised.
Cleveland Fed President Mester stated that the labour market was strong and that it was too early to say if the data changes policy. She reiterated that the Fed was on track for further 50 basis-point rate increases at the June and July meetings. She added that there could be a further 50 basis-point hike at the September meeting, although she did add that there could be a 25 basis-point hike in September if there is compelling evidence that inflation is coming down.
US Treasuries dipped sharply after the US jobs report with the 10-year yield spiking to highs around 2.98% in an immediate reaction. As equities moved lower during the session, there was an element of defensive support and yields retreated to 2.94%, but the dollar posted gains to highs just below 131.00 before a slight correction.
China’s Caixin PMI services index remained in deep contraction at 41.4 for May from 36.2 previously and compared with expectations of 47.3. There was, however, a more optimistic tone surrounding the outlook as coronavirus restrictions continued to ease in Beijing and Shanghai and risk appetite held firm.
Bank of Japan Governor Kuroda reiterated that Japan will not tighten monetary policy and the dollar held around 130.65 on Monday with the Euro just above 140.0.
UK markets were closed on Thursday and Friday which contributed to choppy Sterling selling amid a lack of liquidity. The UK currency posted net gains on Thursday, but reversed sharply on Friday as risk appetite deteriorated again while overall confidence in the UK economy remained depressed. With equity markets moving lower, Sterling dipped to lows below 1.2500 against the dollar while the Euro posted further net gains to 0.8580.
CFTC data recorded a net decline in short non-commercial Sterling positions to just above 74,000 contracts in the latest week from over 80,000 previously.
Political developments will be monitored during the week with further speculation that Prime Minister Johnson will face a confidence vote from Conservative MPs. Although risk appetite stabilised on Monday, Sterling was fragile and held just below 1.2500 against the dollar with the Euro holding around 0.8580.
The Swiss franc was unable to make headway on Friday despite weaker global risk conditions. The Euro secured a net advance to 1.0320 against the Swiss currency while the dollar posted net gains to 0.9625 as US bond yields moved higher.
There will be further debate surrounding National Bank monetary policy with some speculation that the central bank could delay any tightening amid a firm currency. The latest data on sight deposits will be monitored on Monday to assess whether the bank has been intervening with the dollar stabilising around 0.9620 in early Europe.