Photo by: U.S. Department of State (IIP Bureau).
The Dollar really should have been higher in the wake of a strong jobs report.
A failure to launch, despite clear evidence of ongoing resilience in the U.S. labour market speaks volumes of the headwinds facing the currency and will reinforce expectations of further weakness.
The Dollar initially strengthened after it was announced the U.S. created 177K jobs in April, which was considerably higher than the 130K that the consensus of economists expected.
As per our preview, such a beat should have put a rocket up the Dollar and U.S. bond yields.
The USD rally that followed the release lasted a matter of minutes before fading and leaving global FX close to pre-release levels.
Fears of a significant fall in employment were not realised, suggesting the economy is proving far more resilient to uncertainty than many had thought possible, given the massive tariffs announced by President Trump on April 02.
DOGE job cuts have also certainly not made a mark.
All this means there is no reason for the Federal Reserve to cut interest rates next week, which supports U.S. yields and should support the Dollar.
"With favourable supply and demand signals from the jobs report, it becomes virtually a certainty that the Federal Reserve will not cut interest rates next week," says Mohamed A. El-Erian, the noted economist and ex-CEO of Allianz.
The Pound to Dollar exchange rate fell to a low of 1.3259 before recovering to 1.3294. The Euro to Dollar fell to 1.1307 and is now back at 1.1329.
The Euro was seen strengthening into the payroll report, courtesy in part to above-consensus Eurozone core inflation figures released earlier, and is left free to hold those gains.
The failure of the Dollar to lift speaks of a significant headwind blowing against the Dollar and will reinforce the notion that the trend truly has turned, and speaks of the potential for further weakness in the coming days, weeks and months.
In short, markets truly believe this figure is too good to be true and represents a last hurrah for the economy as there is ample survey evidence to suggest the strength will unwind.
Markets Convinced a Slowdown is Coming
One of the most reliable ways of anticipating U.S. economic developments is to monitor shipping activity at U.S. ports, and the data makes it clear the U.S. is about to see a drastic reduction in imports.
"In the 3 weeks since the tariffs took effect, ocean container bookings from China to the United States are down over 60% industry-wide," says Ryan Petersen, Founder and CEO of Flexport.
"If the tariffs on China continue at this level, will we see a $2T hit to economic activity in our country, the failure of tens of thousands of American businesses, and the laying off of millions of employees?" he adds.
Rude surprises might await the U.S. economy, but the resilience of recent days can still extend in the short term, say analysts at ING Bank.
Above: The jobs data has a tendency to beat downbeat expectations. Image courtesy of Berenberg.
ING's argument is that it would have required a really big disappointment to shake the FX market at this stage, and absent such a shock, the easiest route forward for the USD is higher.
Francesco Pesole, FX Strategist at ING, says U.S. assets can keep benefiting from the more subdued tone on US trade policy.
"The question today is whether US jobs data can trigger a reversal in the dollar momentum," says Pesole. "We think not."
Easing Trade War Fears is a Positive for USD
The Dollar has recovered as Donald Trump steps back from threatening ever-higher tariffs and instead offers a more constructive approach, choosing to focus on deal-making.
U.S. markets are finding support ahead of the weekend on further signs the U.S. and China could begin talks soon aimed at easing the impact of Trump’s trade war.
Beijing’s commerce ministry said Friday that it is "currently evaluating" an offer made by the U.S. to commence trade talks. This would mark a significant easing in China's stance on negotiations, with the country having previously shown little interest in rushing to the negotiating table.
But the two sides are now talking about talking, which fires the starting gun on the road to a deal.
According to Atakan Bakiskan, U.S. Economist at Berenberg, businesses remain in a “wait-and-see” mode. They have significantly scaled back their hiring plans but have not started laying off workers.
"The layoff rate remains at historically low levels, while the job-finding rate is gradually declining. This “low hiring, no firing” environment will likely not last long if Trump fails to negotiate away a substantial portion of the current tariffs," he warns.
With the risks still elevated and anxieties high, maybe it is no wonder the Dollar is giving this beat in the job numbers a pass.