DXY Rallies on Hot US NFP Figures; USD/JPY Jumps 1.6% For Biggest Daily Gain Since June

Key Points

• The US dollar surged across the board on Friday after much stronger-than-expected US jobs data.
• USD/JPY jumped 1.6% on a surge in US bond yields across the curve, its biggest one-day gain since June.
• EUR/USD and GBP/USD ended the week lower. Data this week boosted US economic optimism, while the European outlook remains downbeat.

Stronger-than-expected US Jobs Data Boosts Buck

The US dollar surged on Friday in wake of much stronger than anticipated US labor market data for July that eased concerns about the US economy being in recession whilst simultaneously exacerbating worries that inflation may persist at elevated levels. The DXY rose 0.8% on Friday to close out the week 0.7% higher ner 106.50. The US economy added 528,000 jobs in July, far more than the 250,000 expected by economists, while the pace of Average Hourly Earnings growth accelerated to 0.5% MoM and 5.2% YoY from 0.4% and 5.1% in June.

Analysts interpreted the data as strongly supporting the case for further aggressive rate hikes from the US Federal Reserve, with money markets quickly adjusting to imply a more than 60% chance of a 75 bps rate hike at the central bank’s next meeting in September from around 40% prior to the data. The data sent US bond yields lurching higher across the curve, supporting the buck via rate differentials, especially versus the yen.

USD/JPY rallied 1.6% on Friday, its best one-day gain since June, to end the week around 1.4% higher. The BoJ’s policy of keeping 10-year Japanese government bond yields locked close to zero means that the yen is sensitive to movements in bond yields abroad.

US Economy Looking Strong, Eurozone & UK Economies Not So Much

Friday’s jobs data, as well as this week’s US ISM Manufacturing and Services PMI surveys, also highlighted the fact that while other major developed economies look to be on the verge of/already in recession, the US continues to grow. Eurozone Retail Sales and PMI survey data out this week showed that, comparatively, the Eurozone economy is much weaker than the US.

Meanwhile, on Thursday the BoE outlined in its new Monetary Policy Report that it expects a five-quarter long recession to begin from Q4 2022. By contrast, Fed policymakers this week were out in force talking about how 1) the inflation fight in the US is not yet won, so its too early to be talking about pausing/significantly slowing rate hikes and 2) that the US economy remains robust enough to handle tightening, and a soft landing (i.e. bringing inflation down whilst avoiding recession) remains possible.

EUR/USD and GBP/USD thus both look set to close out the week with losses of around 0.5% and 0.8% respectively, having both shed 0.6-0.7% on Friday. In terms of the other major G10 currencies, the loonie shed about 0.5% versus the buck on Friday after data showed its economy unexpectedly shed 30,600 jobs in July and a surprise drop in the participation rate, though its downside was shielded as oil prices stabilized. The Aussie and kiwi both fell 0.8-0.9% on the day versus the buck.