The UK economic data was again stronger than expected as the construction PMI index rose sharply to 57.0 for July from 51.0 the previous month. This was the strongest reading for three years and the largest monthly gain for over five years as house-building recovered. Sterling pushed higher following the data with a GBP/USD move back above 1.5150, although the overall performance was still relatively muted given the impressive run of PMI data.
A slightly smaller than expected decline in Spanish unemployment, the fifth successive drop, and stresses in the Italian coalition following Berlusconi’s failure to over-turn a tax evasion conviction did not have a major market impact.
Consolidation was the main theme ahead of the New York open as traders waited for the latest US employment release. Firm US data over the past two days maintained optimism towards the data. Official estimates were around a monthly employment increase of 185,000, but markets overall were expecting a stronger figure. In anticipation of this, the dollar had a generally bid tone into the US open as US benchmark 10-year bond yields moved towards 2.75%. EUR/USD consolidated close to 1.32 while USD/JPY maintained the impressive advance seen over the past 24 hours with a peak just below the key 100 level.
In the event, the US data was slightly below expectations with a non-farm payroll increase of 162,000 for July from a revised 188,000 gain the previous month. May estimates were also revised down and there was some concern surrounding a drop in both weekly hours and earnings which suggested economic momentum may be slowing. In contrast, there was a decline in the unemployment rate to 7.4% from 7.6% which was four-year low for the series.
With markets positioned for a strong release, the weaker than expected headline number inevitably triggered a sharp response as the dollar dipped sharply. EUR/USD spiked to a peak above 1.3280 while GBP/USD moved above 1.5250 and USD/JPY dipped to test support below 99.0.
There was solid US buying interest at lower levels with expectations that the overall data flow would encourage the Fed to start scaling back bond purchases in September. The US currency was still some distance away from earlier highs and tended to fade again as pre-weekend position adjustment dominated price action later in US trading.