July NFP beats dollar relief rally ensues

The headline non-farm payrolls data for July, released on Friday morning, substantially exceeded expectations at 209,000 non-farm jobs added against prior expectations of around 180,000. In addition, June’s number was revised up from the originally-reported 222,000 to 231,000.

With revisions, job gains over the past three months have averaged a highly-positive 195,000/month. The unemployment rate in July decreased slightly for the better, as expected, from June’s 4.4% back down to 4.3%, which represents a return to a 16-year low. Wage growth for July in the form of average hourly earnings, a key inflation indicator, rose by the expected 0.3%, a better showing than June’s relatively disappointing 0.2% rise. Over the year, average hourly earnings have risen by 2.5%.

While several aspects of the report saw little change from previous data, the significant headline beat and expected bounce-back in wage growth made for a substantially optimistic US jobs report. In the immediate aftermath of the release, markets reacted to this optimism in expected ways. The dollar surged sharply against all of its major counterparts, gold prices fell, and stocks in the pre-market saw a further boost, following through to the upside in record territory on the market open.

Focusing in on the US dollar, the key question continues to be whether a US jobs beat would be sufficient to trigger a long-awaited relief rally for the beleaguered currency. While it is still too early to tell if a sustained dollar rebound and recovery will result from this jobs beat alone, early signs are encouraging. Especially given that the dollar has been heavily pressured for so long and much of the dollar-negative expectations currently pervading the markets have already been priced-in, the current dollar rebound triggered by Friday’s positive NFP showing could well have further to go.

For two key currency pairs, Friday’s dollar move has been highly impactful. EUR/USD pulled back sharply from its long-term peak above 1.1900 established just this week. A subsequent break below 1.1700 would be very bullish for the dollar and a major bearish indication for EUR/USD. In an opposite manner, USD/JPY bounced sharply off a key support area around the critical 110.00 psychological level, also the lower border of an extended price consolidation. Currently moving towards the key 112.00 resistance level, any further breakout could see the currency pair rise to the top of the consolidation as the next major upside target.