Pound / Dollar Rally Could Take Out 1.54 Following Non-Farm Payroll

The British pound has finally found strength against the US dollar following the all-important release of US employment numbers.

 US employment data has disappointed market expectations and it appears that the start of October will be a soft one for the US dollar.

US Non-Farm Payroll data read at 142K, markets had expectations for a reading of 203K; this is a big miss.

The pound sterling has reacted agressively, building on a solid start afforded by the strong UK Construction PMI data released earlier.

As we can see below the 1.51 zone has provided solid support, bringing to an end a sustained period of losses:

As the above shows, moves up and down in the GBP/USD have legs and tend to extend for 2 weeks either way; if history is to repeat an extension to 1.54 should be achievable.

Ahead of the release we had reported Citigroup FX had warned a rebound was due, and the call appears to have been correct.

The problem for the US dollar is there were high expectations for October's release which always spelt heavy downside risk for the USD had the numbers not been achieved.

Amid a good ADP read on Wednesday, the consensus for the NFP was a strong 201k (vs. 173k last month) with stable unemployment rate (5.1%) and higher wages (2.4%y/y versus 2.2%y/y in August).

The prospect of an interest rate rise at the US Fed now appears to have subsided according to Dennis de Jong, managing director at UFX.com:

“The US economy seems fairly resilient but, with employment data particularly disappointing for a second month running, enthusiasm for a rate hike in the short term will surely be tempered.

“The Federal Reserve don’t want to sit on their hands for too much longer, yet with significant global issues continuing to affect the US economy,  now would not be the wisest time to press the button.

“We’re surely not too far away from a first hike in seven years, although both US and global economic data will have to improve if it’s to happen before the end of the year.

Despite the data comments from various Fed officials, including Chair Yellen, have expressed support for a lift-off before year end, although interest rate markets put the probability of a move this year at around 40%.

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A Definite Deterioration in the US Employment Situation

Beyond the headline number, "we see broad-based weakness in US labour markets, with the past month’s revisions now showing a decidedly softer trend growth in jobs," says Michael Gapen at Barclays.

Although the U3 unemployment rate was unchanged at 5.1%, the participation rate fell 0.2 to 62.4%.

The broader U6 underemployment rate, which includes part-time workers, declined three-tenths, to 10.0%, as the number of workers who are part time for economic reasons dropped sharply.

"However, given the overall weakness in the report, we do not take that decline as a positive sign, as some of that decline likely reflects workers leaving the workforce rather than finding full time work. Average hourly earnings were also soft, rising 0.0% m/m, much weaker than expected," say Barclays.