FX Market Summary 05-02-2014: Dollar Payroll Gains Reversed

Ultimately, it was another disappointing day for the dollar on Friday despite a brief payrolls boost. Narrow ranges persisted ahead of the US open with traders unwilling to take aggressive positions ahead of the payrolls release.

The Japanese unemployment data was in line with expectations while there was a stronger reading for household spending at an annual 7.2%. The data was distorted by buying ahead of the sales-tax increase and there will be unease over a sharp downturn for the next release.

Global currency volatility remained at low levels which did provide some underlying support for carry trades and also encouraged some yen selling on the crosses, especially with solid regional equity markets. Moves were still limited with the dollar edging towards 102.50 in Europe.

The latest UK construction PMI data release was weaker than expected with a decline to 60.8 for April from 62.5 previously. GBP/USD spiked lower, although the overall reaction was limited with the data series still robust in historic terms.

Merger activity remained important with AstraZeneca rejected the latest, increased offer from Pfizer. Sterling has received significant support from anticipation of capital inflows following any merger and GBP/USD dipped lower with profit taking also an important feature after failing to sustain a move above 1.69. There was support above 1.6850 as EUR/GBP continued to test 0.82 support.

The European data releases failed to provide any significant excitement with little change for the latest PMI releases and EUR/USD was inevitably trapped within a narrow range as caution prevailed ahead of the monthly US employment report. There was support on approach to 1.3850 while resistance held firm.

The April US employment data was substantially stronger than expected with a headline non-farm payrolls increase of 288,000 for April following a revised 203,000 gain the previous month as unemployment also dropped much more sharply than expected to 6.3% from 6.7%. The dollar inevitably spiked higher following the release as EUR/USD dropped to below 1.3820 and USD/JPY moved to test resistance in the 103.0 area.

The report details were not quite as favourable with static earnings and a decline in the participation rate which curbed bullish dollar expectations to some extent as it backed away from major resistance levels. There was a significant reversal later in the New York session as the dollar lost all the payroll gains. EUR/USD moved back to 1.3860 and USD/JPY retreated sharply to 102.30 as US bond yields fell to the lowest level for 3 months with 10-year benchmark yields below 2.60%.

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