Dollar Spikes Against Pound and Euro Following Bumper U.S. Jobs Report

The Dollar surged alongside treasury yields and stock markets tanked after the U.S. reported a surprisingly strong jobs report for September, raising the odds of further hikes at the U.S. Federal Reserve ahead of year-end.

"Like a ship staying its course despite strong headwinds, the September U.S. jobs report is telling us the underlying resilience of the US economy is greater than many anticipated," says Ali Jaffery, an economist at CIBC Bank.

The Pound to Dollar exchange rate slumped by over half a per cent to a daily low of 1.2117 after the Bureau of Labor Statistics reported 336K additional jobs were created in September against the 171K expected by the market.

"The dollar jumped initially, while index futures dropped sharply as the data raises the prospects of interest rates remaining high for longer," says Fawad Razaqzada, Market Analyst at City Index.

Above: GBPUSD showing a clear downside reaction to the release of the U.S. data.

The Euro fell below 1.05 to quote at 1.0490 amidst a broad-based bid for the Dollar while the ten-year treasury yield surged to 4.85% reigniting concerns that the financial system is at risk of instability owing to the rapid appreciating in borrowing costs.

"The BIG upside surprise in job creation, and with such widespread gains, will lead to a selloff in both stocks and bonds, especially as labour force participation did not tick up in any meaningful way and despite broadly in line earnings. Given how often the FederalReserve has stressed that it is data dependent, this will put a hike back on the table for markets on November 1," says Mohamed A. El-Erian, President of Queens' College at Cambridge University and adviser to Allianz.

Falling stock markets are typically supportive of the 'safe haven' Dollar, adding to the demand already created by rising bond yields.

Average Hourly Earnings meanwhile came in a touch weaker at 0.2% month-on-month, against the 0.3% expected, taking the year-on-year rate 4.2% compared to 4.3% expected.

"This is moving in the right direction in as far as Powell and co. are concerned," says Razaqzada.

Above: The surge in U.S. ten-year yields has been a focus of concern for markets over recent weeks and has ultimately proven USD supportive.

The Dollar is likely to remain in the ascendency given these data unequivocally support the 'higher for longer' expectation for U.S. interest rates, which has underscored its advance since July.

The Pound, Euro and other G10 currencies are ultimately likely to remain under pressure until data starts surprisingly to the downside in response to a cooling economy, or the rise in bond yields creates problems in corners of the financial market.