Strong Jobs Report Aids U.S. Dollar

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The prospect of a June interest rate hike at the Federal Reserve was kept alive after the headline figure in the latest U.S. employment report handsomely beat expectations.

Non-farm payroll report smashed expectations at 339K against the 180K expected, surpassing April's upwardly revised 294K.

The rule of thumb suggests the Dollar would benefit as the data implies the Fed had more work to do to cool the economy and inflation. GBPUSD trended lower following the data and ended the day with a 0.6% loss as it closed the week at 1.2447. 

EURUSD fell half a per cent to close the week at 1.0706. 

But there are some confusing developments for investors as the household survey revealed an unexpected rise in the unemployment rate to 3.7% from 3.4% previously.

Wages meanwhile came in softer with Average Hourly Earnings rising 0.3% month-on-month in May, below the 0.4% expected and a slowdown on April's 0.4%, also hinting at weakness in the jobs market.

Although the headline from the jobs report was supportive of the Dollar, further follow-through strength will depend on how convinced investors are that the Fed will in fact raise interest rates this month.

"Establishment survey showed a 339k increase in nonfarm payrolls. The household survey showed a 313k loss of jobs (hence the unemployment jump). Odds of Fed hike this month spikes but now back below 30%," says Marc Chandler, an analyst at Bannockburn FX.

The Dollar had been on the back foot ahead of the jobs report amidst a combination of factors that include the resolution of the U.S. government funding drama and comments from a number of Federal Reserve board members that the Fed should consider skipping a rate hike in June in favour of a move in July.

"Apart from the robust job creation, the data indicate a cooling of the labour market. This allows the Fed to sit tight at the FOMC meeting on 13/14 June and at least pause on rate hikes. The US central bank can then wait and see how things develop and, if necessary, tighten more at a later date," says Christoph Balz, Senior Economist at Commerzbank.

The Dollar's reaction to the jobs report might have been to strengthen, but uncertainty about the direction of travel at the Fed might suggest a meaningful extension of this strength is not guaranteed.