Payrolls surprise sees Dollar lurch higher, as EUR/USD takes step closer to parity

The jump in US payrolls last month had a major impact on financial markets. The dollar surged higher, the oil price is higher by 3.55%, and Brent crude oil is now above $80 per barrel, the highest level since October. Equities are lower, and although bond yields surged in the minutes after the release, they have retreated as we have progressed through the afternoon.

US payrolls expanded by 256k last month, beating the 165k expected and higher than the downwardly revised 212k for November. Far from moderating as analysts expected, the US labour market is expanding at a decent clip. This was the 48th month of expansion. The largest number of jobs were created in the education and health services sector, however, there was an unexpected increase in trade, transportation, and utilities jobs, this comes after jobs in this sector contracted in November. Usually increases in the transportation sector is a sign of economic strength and the boost to utilities jobs could be in anticipation of Donald Trump’s entry to the White House and his fondness for drilling more oil wells, which may be boosting the oil price on Friday.

True resilience on show from the US labour market

The unemployment rate also ticked lower to 4.1% from 4.2%, and the underemployment rate also ticked lower to 7.5% from 7.7%. This suggests that both the household survey and the establishment survey of labour market growth strengthened last month, which is a true sign of labour market resilience in the US.

Market reaction hits stocks hard as bond yields waver

The market reaction was brutal, stocks are a sea of red in Europe and in the US. The Dow Jones is down nearly 1%, however, the biggest casualty in the US is the Nasdaq, which is lower by 1.61% as growth companies get sold off on the back of reduced expectations for Federal Reserve interest rate cuts.

Could Italy be the next victim of the bond market vigilantes?

The global bond market initially sold off sharply on the back of the payrolls report. As Treasury yields surged, UK bond yields, which have risen sharply this week, followed Treasury yields higher, but have since retreated, no doubt giving the UK Treasury some breathing room after a stressful week. The 10-year UK bond yield is higher by 2.9bps, this is roughly inline with other European bond yields. The 10-year Treasury yield is higher by nearly 6bps. Interestingly, Italy’s 10-year yield has had a bigger upward reaction to the payrolls figure than UK yields. Since Italy also has a problem with overspending public money, this could be a sign that Italy’s bonds could come under the glare of the bond market vigilantes in the coming weeks.

Dollar is king once more

The dollar lurched higher as the stronger pace of jobs growth reduced expectations of Fed rate cuts this year. There is now only a 36% chance of a rate cut by May and less than a 50% chance of a rate cut by June. US interest rates are now expected to end 2025 at 3.99%, nearly 10bps higher than Thursday. GBP/USD initially sold off sharply and fell below $1.22 for the first time since 2023, however, it has since recovered slightly and is back above $1.2230. It has been a bruising week for the pound. The path of least resistance for sterling is lower, and another sell off could see this pair test the key support level of $1.20.  EUR/USD also dropped by 90 pips in the aftermath of this report, however, it has since recovered by 20pips, although the euro still looks extremely weak. Parity for EUR/USD is within striking distance, and with such a large gap in growth expectations and the dollar’s yield advantage, it is hard to imagine that traders will not test this psychologically significant level in the coming days and weeks.