U.S. Dollar Falls against Pound and Euro in Wake of Another Disappointing Jobs Report

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The U.S. Dollar retreated against the Euro, Pound and other major currencies following the release of a softer-than-expected set of labour market statistics out of the United States.

The U.S. non-farm payroll May edition revealed the economy created 559K jobs, more than the 278K created in April but less than the 650K markets expected.

"The US dollar was having a good week and prior to the US jobs report had advanced against all G10 currencies," says Derek Halpenny, Head of Research, Global Markets EMEA and International Securities at MUFG.

The Pound-to-Dollar exchange rate (GBP/USD) rose by nearly half a percent in the wake of the numbers as the Dollar gave back those gains it made on June 03 following the release of consensus-beating Initial Jobless Claims and ADP non-farm employment figures that hinted the headline Friday non-farm report would come in strong.

"The U.S. dollar slipped from three-week highs after hiring accelerated less than expected last month," says Joe Manimbo, Senior Market Analyst at Western Union.

Above: GBP/USD's around-trip on the back of conflicting U.S. data. 

An article on Pound Sterling Live released ahead of the release said that market expectations for a strong report had risen quite notably in the wake of Thursday's data and some currency analysts warned there were notable downside risks to the Dollar going into this report as a result.

The Euro-Dollar exchange rate recovered ground lost over the preceding 24 hours to quote at 1.2169.

"The underwhelming employment gain was driven largely by growth in the leisure and hospitality industry, while average wages rose by a strong 0.5% on the month as employers tried to attract workers," says Katherine Judge, Senior Economist at CIBC Capital Markets.

The U.S. unemployment rate did however unexpectedly fall to 5.8%, aided by a slight drop in the participation rate.

"Our research suggests that generous unemployment benefit supplements have been the main factor holding employment gains back amidst record levels of job openings, but with many states moving to end the supplements in June, we expect millions of jobs to be added over the summer months," says Judge.

Employment reports have become increasingly important to investors in 2021 given the Federal Reserve's assertion they will not reduce their quantitative easing programme (tapering) until more jobs are created.

Tapering the quantitative easing programme is meanwhile a prerequisite for an interest rate rise, which is in turn a driver of Dollar strength.

Any meaningful strength in the Dollar will only likely arrive when the Fed says it is feeling confident enough to lay out a programme to taper.

"The jobs report also keeps the bar elevated for the Fed to change course on policy. The specter of low rates for longer remains a significant vulnerability for the dollar," says Manimbo.

"The weaker jobs data certainly plays into expectations shifting back to a longer drawn out process of moving to tapering and this will help cap yields and the US dollar," says MUFG's Halpenny.

But Judge says a summer jump in job creation would likely be enough to allow the Fed to announce at its September meeting a tapering of QE to start in early 2022.

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Economists have been assessing why the U.S. economy is not creating more jobs at this point in the recovery, particularly as the Covid-19 crisis appears to have largely passed and very little by way of restrictions remain in place.

"This is not a demand issue. A host of reasons are keeping the supply of workers constrained, which means firms are having to pay-up if they want to recruit staff. Tensions will eventually ease, but in the near term it heightens the risk of more elevated inflation readings," says James Knightley, Chief International Economist at ING Bank.

What is causing this supply of labour issue then?

Knightley sees four factors at play:

Ongoing child-care issues surrounding home schooling remain as schools are not yet fully open, which is forcing many parents to stay at home rather than go out to work.

there is also still some concern from some workers about returning given the pandemic isn’t over.

some older workers who lost their jobs may simply have decided to retire early.

there is the debate over the impact from extended and uprated unemployment benefits.

"They may have weakened the financial incentive of going out to work, particularly for low paid roles, especially when you factor in associated costs of commuting and any childcare," says Knightley.

Indeed, demand for workers is high as job openings have now reached record levels as the ratio of unemployed worker per job opening fell to 1.2 in March from a high of 5 in April 2020.

"One has to be actively seeking employment to be counted in the labour force as unemployed, and many chose to stay out. Workers have been sidelined, reportedly, by health-related concerns, childcare challenges, and also higher savings accumulated throughout the pandemic," says Claire Fan, Economist at RBC Economics.

Employment is expected by RBC to continue to grow over the summer as businesses more fully reopen.

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