(Bloomberg) -- The dollar dropped to its lowest since before the U.S. presidential election in November after the May U.S. employment report missed both analyst forecasts and elevated trader expectations, leaving the timing of Federal Reserve rate hikes beyond June in question.
The greenback declined as much as 0.5 percent after the data, reaching its lowest since Nov. 4 and relinquishing gains of 0.1 percent built ahead of the jobs report. Average hourly earnings growth slowed, raising questions about whether tight employment is feeding through to wages, a key component of inflationary gauges. The dollar fell versus nine of its G-10 peers and the Bloomberg dollar index was on track to end the week with a loss of 0.4 percent.
- Reaction was swift to the data, which showed non-farm payrolls increased by 138k, below estimates for 182k, and average hourly earnings rose 2.5% y/y, missing a forecast of 2.6%. The 10Y UST yield fell to the lowest since early November before paring its drop, the USD/JPY fell quickly under 111.00 and EUR/USD climbed to its highest of the year, approaching its Nov. 9 high at 1.1300
- The jobs report was “absolutely not a recipe” to knock the Fed off course from a 25bps hike in June, though it raised “a few more questions about Fed policy further out,” said Alan Ruskin, co-head of FX research at Deutsche Bank
- “Today's payroll report was suboptimal, for sure, and that's driving a stake through the U.S. dollar,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank. “May's number was much lower than expectations and the lower revisions just added insult to injury”
- In remarks after the jobs report, Philadelphia Fed President Harker said concerns about “less-than-perfect” inflation data in recent months are “unwarranted” and maintained his support for three 25bp rate hikes this year on the strength of the economy
- EUR/USD rose above 1.1280 after the data, climbing from session low just above 1.1200 seen before the jobs report; the weaker USD outlook plays into trader tactics to buy EUR on dips as focus shifts to next week's ECB meeting. Offers to sell the common currency were absorbed at 1.1245. Further supply, some option-related, is positioned ahead of 1.1300, the post-U.S. election high for the pair, with stops above that level. Speculation has built that the ECB may shift its language to acknowledge a recently improved economic outlook with diminished downside risks, a precursor to possible tapering of its asset purchase program. ECB President Draghi has frequently pointed to subdued inflation pressures as a reason to maintain the current ECB stance
- USD/JPY dropped to lowest since May 18 at 110.33 after falling quickly from the 111.40 area just after the jobs report. USD/JPY is testing support at the 200-DMA 110.32; large stop-loss sell orders are positioned below 110.00, a trader in London said. Japanese banks were seen as USD sellers before and after the jobs report, according to traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. Some of those players were likely unwinding USD longs set after the pair rebounded from midweek lows near 110.60
- USD/CAD is trading around 1.3495, after the biggest drop in a week to reach 1.3482. The pair is on track for a weekly gain of around 0.4%, following two weeks of losses
--With assistance from Lananh Nguyen
To contact the reporters on this story: Dennis Pettit in New York at dpettit5@bloomberg.net, Alexandria Arnold in Seattle at abaca3@bloomberg.net.
To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Greg Chang, Elizabeth Stanton
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