Asian trading was generally subdued on Friday with caution prevailing ahead of the key US employment data. A weaker than expected Chinese trade report did not have a major market impact with USD/JPY edging towards the 105 level.
The early European session was marked by UK economic data which was significantly weaker than expected. Industrial production was unchanged for November compared with a consensus 0.4% monthly increase and the there was also an unexpected sharp decline for construction output. The data continues to cause underlying confusion given a widening disparity between PMI survey data and official releases.
Markets concentrated on the immediate headlines and pushed Sterling sharply weaker. GBP/USD had already weakened to test the 1.6450 area ahead of the release and retreated sharply further to just above the 1.64 support level as EUR/GBP rallied back to 0.8280.
The dollar was able to maintain a firm tone ahead of the crucial US employment data with low trading volumes inevitably a feature. Markets looked to position themselves for a stronger than expected release with whisper numbers for around the 250,000 area. In this context, EUR/USD retreated back below 1.36 into the release.
In the event, the headline US payrolls data was much weaker than expected with an increase of 74,000 for December from a revised 241,000 gain the previous month. The data was overall was very mixed as the unemployment rate fell sharply to 6.7%, the first time is has been below 7.0% since 2008. The decline appeared to be triggered more by a renewed increase in people leaving the labour force rather than any improvement in the employment conditions.
The headline data would likely to have put the dollar under pressure in all circumstance and the situation was enhanced by expectations of strong data heading into the release with little opportunity to assess the underlying message.
Despite an immediate spike lower on the unemployment rate, EUR/USD rallied firmly to a peak in the 1.3680 area during the New York session while USD/CHF retreated to lows near 0.9000 before finding some relief.
USD/JPY initially dipped sharply to lows below 104.20 and tested support below 104 later in New York as aggressive yen short covering kicked in. GBP/USD reversed its earlier losses and moved sharply higher with a peak above 1.65 on the back of wider dollar losses as EUR/GBP struggled to hold above the 0.83 level.