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The Dollar was sold after non-farm payrolls massively undershot consensus.
U.S. bond yields and the Dollar fell and the odds of a September rate cut at the Federal Reserve rose after the U.S. was reported to have added 73K jobs in July, massively undershooting the consensus estimate of 110K.
The previous month's payroll was also revised lower to 14K, signalling a decided cooling in the job market.
The Pound to Dollar exchange rate (GBP/USD) surged 1.10% in the 15-minute window following the release, taking the pair to 1.3290, from 1.3142 prior. The two-year U.S. bond yield - which is closely aligned to Federal Reserve interest rate expectations - dropped from 3.96% to 3.77%.
"GBP/USD rebounds sharply on weak payrolls," says Justin McQueen, a Reuters market analyst. He points out that market implied odds of a September cut at the Fed shot up to 75% post-release, whereas it signalled no change prior.
The turn higher follows six days of consecutive losses in GBP/USD, but the strength of the rebound could staunch the bleeding. "Watch the daily close, as above 1.3283 would mark a key day reversal, thus, signalling that downside may be exhausted for now," says McQueen.
In recent years economists and market participants have habitually underestimated the labour market report, with consensus deviations more often than not landing higher, which might have lead to some complacency heading into the August 01 print.
The significance of the August 01 deviation is therefore sizeable and of the scale that can have a material market impact.
Above: GBP/USD at 5-minute intervals showing the strength of the market's reaction to these data.
"The dollar is plunging after the U.S. labour market hit a wall last month, reinforcing market expectations for at least two rate cuts from the Federal Reserve in the back half of the year," says Karl Schamotta, FX Strategist at Corpay, the international payments specialist.
The weak print is no one-off, and backs a growing trend of cooling conditions. For instance, the previous two editions were revised lower by a combined 260K, while private sector job creation is now negative.
Schamotta points out that total payroll gains have averaged 35K over the last three months, marking the weakest pace since the depths of the pandemic in 2020.
The Federal Reserve has a dual mandate of controlling inflation and supporting jobs; having been focussed on inflation for the past four years, it will likely pivot focus to the labour market. By cutting intrest rates it would stimulate the economy, save jobs and create more vacancies.
However, the obvious risk to this is that it risks pushing inflation higher again, which could become quite destabilising for the economy.
Nevertheless, economists think the Fed will be more willing to take that risk by cutting at least twice more this year.
"This likely changes the Fed's calculus," says Nigel Green, CEO of deVere Group. "The data the central bank had been relying on has now been invalidated. There's a clear shift in labour market momentum, and it justifies fresh action."
The Federal Reserve kept interest rates unchanged for a fifth consecutive occasion on Wednesday, and offered scant indication that it would be inclined to cut interest rates in September, prompting the Dollar to rally.
If anything, the Fed was surprisingly forthright in its opposition to a cut, with Chair Jerome Powell surprising onlookers by saying, "you could argue we are a bit looking through goods inflation by not raising rates." The introduction of rate hikes into the discussion was something that caught traders by surprise.
Powell's steadfast communications flew in the face of U.S. President Donald Trump's repeated attempts to strong-arm the Fed into cutting rates, as he has stated on a number of occasions that the Fed is already too late.
Unfortunately for Powell, it could be that the President is correct.