For most of last week, today’s speech by Fed chief Janet Yellen was being viewed through a lens of the timing potential for a June rate rise. This was largely down to some large scale expectations management by a raft of Fed officials in the lead up to Fridays May payrolls report.

This concerted push from across both the dovish and hawkish camps on the FOMC helped push market expectations for a potential summer rate rise up to over 50% for a July move and from 4% to a peak of 36% for a move this month, and while the odds of a move in June subsequently slid back to the low 20’s prior to Fridays report, it was always going to take something substantial to shift the balance of probabilities away from a summer rate rise given all the heavy briefings by numerous Fed officials in the last two weeks.

Friday’s May payrolls data threw all of the careful briefing of the past two weeks up in the air, as the US economy posted its worst monthly jobs number since late 2010, at 38k which was bad enough, but to compound that we also saw a net revision to the March and April numbers of -59k jobs, with March revised down to 186k from 208k and April from 160k to 123k.

There was no silver lining to these jobs numbers, they were unambiguously bad and even though the unemployment rate dropped to 4.7%, most of that was down to people leaving the work force as labour participation dropped from 62.8% to 62.6%, its lowest level this year, and not far off its lowest level in 40 years.

Initial Fed reaction to Friday’s numbers came from Lael Brainard in a speech a few hours after the release of the numbers, where she warned unsurprisingly that given the weakness seen so far in the most recent Q2 data that a policy of wait and see was probably appropriate.

More importantly will be the tone of Janet Yellen’s speech later today given her and other Fed official’s bullishness about the US labour market and the US economy in general. In essence it is going to be enormously difficult for the Fed to steer itself out of the corner it has painted itself into having so deliberately built up market expectations in the manner they have in the past few weeks. 

How will Ms Yellen explain away the sharp slowdown in hiring in the context of her and recent public pronouncements of confidence in the US labour market?

This bullishness had encouraged a belief amongst US investors that a rate rise would be something that could be absorbed by the market, however Friday’s data changes the narrative completely.

For some time now the US economy has been one of the primary drivers of global growth, along with the Chinese economy, despite concerns that the pace of both economies might be slowing.

Now it would appear that both economies are starting to misfire, and the rebound that was expected after a disappointing Q1 may well not happen after all.

While the US dollar saw its biggest one day fall since December last year as expectations of a possible rate rise got pushed out into the autumn, both ECB President Mario Draghi and Bank of Japan governor will no doubt have different feelings. A Fed rate rise would have gone some way to taking the pressure off their own currencies. This now looks a distant prospect which suggests both could come under pressure to enact more measures of their own in the coming months.

The pound looks set to start the week on the back foot as the opinion polls continue to point to an increasingly close contest in the UK referendum as speculation increases about further gains in the polls for the leave camp.

EURUSD – the failure to push below the 200 day MA at 1.1100, and trend line support from the December lows saw a strong rebound on Friday, which saw the euro recover back through the 1.1250 level towards the 1.1400 area. 

GBPUSD – Fridays rebound through the 1.4500 level to 1.4580 proved to be somewhat short lived and as such the risk remains for a return towards the May lows at 1.4330. Below that we have trend line support at 1.4270 from the lows this year.

EURGBP – the euro posted one of its biggest weekly gains against the pound in three years last week as sterling weakness saw a move through the 0.7820 area, with potential for a move back to 0.7930, and the May highs. A fall back below 0.7720 retargets the 0.7640 area.

USDJPY – the US dollar looks vulnerable to a retest of the 105.50 lows after Friday’s late plunge, through 107.00. We need to push back through the 108.50 area to stabilise.

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