US$ Stages Strong Rally After Payrolls Smash Expectations

USD

After gaining yesterday on the back of the Bank of England’s decision to ramp up stimulus, the U.S. dollar ceded some of those gains overnight.  Traders have been anxiously awaiting today’s release of Non-Farm payrolls, the largest risk event on this week’s docket.

The economic docket did not disappoint as the payroll report smashed expectations. Payrolls climbed 255K in July, besting all of the forecasts collected by Bloomberg.  The median estimate was for a 180K increase.  Last month’s impressive 287K reading was upwardly revised to 292K.  The unemployment rate held at 4.9%.

A deeper look at the report showed promising signs for wage growth as well.  Average hourly earnings rose more than forecast (0.3% v. 0.2% expected) on a month over month basis.  The year over year increase was 2.6% in July, the same as June.

The glowing jobs report comes a week after Gross Domestic product disappointed and caused the U.S. dollar to sell-off.  Today’s print is likely to allow the greenback to claw back  those losses and cause traders to slightly increase future interest rate hike bets for early 2017.

GBP

The British pound retraced some of its steep losses from yesterday overnight, causing market participants to ponder if the GBP/USD has carved out a bottom.  The sterling is over 12.0% weaker against its American rival since the end of June, when British voters decided to leave the European Union.

The Bank of England yesterday utilized a number of monetary tools to help stimulate the economy and reduce the negative effects of the “Brexit” vote.  In all, the Bank of England added 170 billion pounds to its balance sheet, including 70 billion in new quantitative easing.  The central bank also lowered its main interest rate to an all-time low of 0.25%.

In a press release following the decision, BoE Governor Mark Carney stressed that the Bank alone could not buoy the economy.  He called for the government to increase fiscal stimulus to stave off a deep recession.

Recent economic data has backed-up the fear that the Brexit vote is starting to affect the real economy.  U.K. house prices fell 1.0% in the month of July, well below expectation of a small 0.2% drop.

AUD

The Australian dollar has gained over a half a percent against the U.S. dollar in early trading as traders being to pare back bets that the Reserve Bank of Australia will cut rates again later this year.  In its quarterly statement released today, the RBA left its growth and inflation forecasts little changed and gave little insight on future interest-rate guidance.

The RBA cut interest rates to a record low on Tuesday.  But the Australian dollar is not at a three-week high against the U.S. dollar as traders have reduced bets below 50.0% that the central bank will cut again this year.  The Aussie also found support as iron ore prices climbed.