Pound Spikes against Dollar on U.S. Labour Market Surprise

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• GBP/USD spot rate at time of writing: 1.3964
• Bank transfer rate (indicative guide): 1.3570-1.3670
• FX specialist providers (indicative guide): 1.3830-1.3860
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The U.S. Dollar fell sharply across the board after data showed the U.S. grew less jobs than the market was expecting in April.

The much-anticipated non-farm Payrolls figure for April read at 266K, which is far less than the 978K number of jobs the market expected the U.S. economy to generate.

Piling on the disappointment was a revision lower of the March number to 770K.

The surprisingly weak number will cast doubt on the U.S. economic recovery and confirms that for the Dollar U.S. economic strength is currently translating into U.S. Dollar strength.

The Pound-to-Dollar exchange rate spiked half a percent to 1.3970 in the five minutes following the release:

Above: GBP/USD showed a strong reaction to the U.S. data release. 

"I can't fully explain one of the biggest NFP misses ever, but it seems like a fluke. Everything else is pointing to a booming economy. Can I suggest not to believe your lying eyes? USD was offered in recent days and still offered. Yields are snapping back from quick push lower," says Marc Chandler at Bannockburn Global Forex.

The Euro-to-Dollar exchange rate meanwhile jumped to 1.2130 and looks set to test the April 21 high of 1.2150 imminently.

The employment figures out of the U.S. were almost universally poor, with the unemployment rate for April rising to 6.1% from 6.0% in March, the market had expected a figure of 5.8%.

Katherine Judge, an economist with CIBC Capital Markets says the softness was relatively broad based, with goods sectors seeing losses on the month, while leisure and hospitality was the only services sector to see a material gain in jobs, with government being the next best performer.

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"We'll stick to our view that there will be much stronger job gains ahead, but today's data will leave the Fed's dovish tone intact," says Judge.

The U.S. Federal Reserve in March said they would keep interest rates unchanged and quantitative easing rolling on until they were convinced the jobs market was on the road to a sustainable recovery.

Our coverage of the Fed event highlighted the requirement for a string of blockbuster jobs reports as a prerequisite for the market to start pricing in higher U.S. interest rates.

It appears the foreign exchange market had been holding the Dollar at levels consistent with the Fed beating a retreat from their 'dovish' guidance; but today's data will go some way in realigning market expectations.

"The Federal Reserve will be feeling vindicated with its over-cautious stance and its dovishness will be entrenched for a while longer after this data set," says Paul Craig, portfolio manager at Quilter Investors.

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A question for those watching the Dollar should be whether or not the market fades the Friday moves having bet that the disappointing report is an outlier in a general trend of improvement.

"There shouldn’t be too much read into the US jobs data despite the large miss. Investors need to be looking at the full picture, and while this might suggest the economic recovery is not as quick as it could be, there are reasons to be less concerned," says Craig.

Quilter Investors don’t expect misses like this going forward citing survey data which is showing people are at home just now living off the support provided during the pandemic by the U.S. government.

"Once this switches off, they will return to the workforce. Furthermore, of those employed the number of hours worked is increasing, while the underemployment rate is decreasing," says Craig.

Those watching GBP/USD should be aware that the exchange rate has since April 20 retreated into an increasingly tight range centred around a mid-point of ~1.3870.

In the near-term swings around here are likely to be faded and mean reversions towards this pivot could be anticipated, therefore it is possible that the spike witnessed on Friday is reversed over coming days. 

"We expect the jobs recovery to get back on track over the next few months, but this report underscores that the Fed will be patient for a while when it comes to scaling back accommodation," says Sarah House, Senior Economist at Wells Fargo Securities.