Pound To Dollar Exchange Rate Slides After US Payrolls Surge

The US Dollar edged lower ahead of the latest US jobs data, but then surged after stronger-than-expected data.

The US jobs data overall has suggested a weaker labour market which fuelled expectations that this month’s jobs data would be weaker than expected.

In this context, the impact of much stronger than expected headline data was magnified by traders being wrong footed.

The Pound to Dollar (GBP/USD) exchange rate tested 1.2820 ahead of the data and close to 11-week highs before sliding to 1.2720 after the data.

The Pound to Euro (GBP/EUR) exchange rate edged higher to 1.1760 and just below key resistance.

US non-farm payrolls increased 272,000 for May, much higher than consensus forecasts of around 180,000, although there was a small downward revision for April to 165,000 from 175,000 reported previously.

The household survey was weaker as the unemployment rate increased to 4.0% compared with expectations of no change at 3.9%.

This was the highest unemployment rate since early 2022.

The survey also reported a decline in employment of over 400,000 for the month while the participation rate declined.

Average earnings increased 0.4% compared with forecasts of 0.3% with a year-on-year increase of 4.1%, above expectations of 3.9%.

The wages and payrolls data sparked renewed fears over inflation pressure in the economy.

In this context, there were inevitably fresh doubts whether the Federal Reserve would be able to cut interest rates within the next few months.

Following the data, the chances of a July rate cut dipped to below 10% from near 20% while the potential for a September cut also dipped to near 50%.

ING commented; “In terms of what this means for the Fed next week – well it confirms that the Fed will be pushing back rate cut projections from 3 cuts this year and 3 cuts next year to most probably 2 cuts this year and 4 next, but we can’t rule them out saying just one for this year.”

Treasuries posted sharp losses with the 10-year yield jumping to above 4.40% from below 4.30%.

Equity markets were subjected to renewed selling pressure and weaker risk appetite would also tend to undermine support for the Pound.

There is still likely to be an important element of uncertainty given that the survey evidence has suggested that the labour market is not as robust.

Peter Cardillo, Chief Market Economist at Spartan Capital Securities commented; “This is a hot number, and of course the part that is most interested to the Fed is the hourly wages, which rose more than expected on a year-to-year basis to over 4%.”

Cardillo noted; “We have CPI next week and this is only one report but the fact that hourly wages went up on a year-to-year basis that is not good news for the Fed.”

He added; “This report probably erases the hope of a September rate cut and pushes it back to maybe December.

UK developments were limited during the day with a fresh setback for Prime Minister Sunak and opinion polls still suggesting that Labour has a commanding lead.

According to Scotiabank’s Shaun Osborne; “To say it’s not going well is an understatement. Cable is retaining a small gain on the week, unbothered by the prospect of a large Labour win (at least now).”

Santander UK economist Gabriella Willis has reservations over the UK growth outlook; “Of late much has been made of the wet weather, but for us the continued use of this ‘explanation’ is starting to wear thin, with signs of genuine weakness in demand here rather than merely attributable to the weather.”

She added; “A quarter of tepid growth would probably be perfect for the BoE right now, ‘not too hot, nor too cold’, giving the BoE time without a sharp contraction in activity forcing its hand with early cuts and without strong demand reigniting more robust price-setting behaviour.”