US Jobless Claims Hit 200K as Construction Spending Surges, but Productivity Miss Muddies Fed Path

The US dollar (DXY) traded in a tight range Thursday afternoon after a batch of mixed economic data provided conflicting signals on the Federal Reserve's policy trajectory. While weekly jobless claims and construction spending beat expectations, disappointing productivity figures added to concerns that the economy may be losing momentum even as cpi" title="Understanding inflation and CPI in forex">inflation pressures persist.

Jobless Claims Beat Expectations, Labor Market Holds Firm

US initial jobless claims fell to 200,000 for the week ending May 2, coming in below the consensus estimate of 205,000 and down from the previous week's revised 190,000. The four-week moving average declined to 203,250 from 207,750, signaling continued resilience in the labor market despite mounting economic headwinds from elevated oil prices and geopolitical uncertainty.

Continuing jobless claims for the week ending April 25 dropped to 1.766 million, also beating the 1.800 million forecast and marking a decline from the prior week's 1.776 million. The figures suggest that while hiring may have slowed, layoffs remain subdued and workers who do lose jobs are finding new employment relatively quickly.

The tight labor market has been a double-edged sword for the Fed. On one hand, low unemployment supports consumer spending and economic growth. On the other, it keeps upward pressure on wages and services inflation, complicating the central bank's efforts to bring price growth back to its 2% target.

Construction Spending Surges, Defying Sector Pessimism

In a surprise upside, US construction spending jumped 0.6% month-over-month in March, tripling the consensus forecast of 0.2% and reversing February's revised -0.2% decline. The strong print defied widespread expectations that the sector would continue to contract amid high interest rates and softening demand.

Public construction spending rose 0.6% to $529.2 billion, led by a 3.3% surge in highway construction, while private construction—which had fallen 0.6% to $1.66 trillion in February—showed signs of stabilization. Residential construction remained under pressure, down 0.8%, but nonresidential construction slipped only 0.4%, a modest decline compared to earlier forecasts of sharper contractions.

The data provides a rare bright spot for a sector that has struggled throughout 2025 and early 2026. Industry forecasts heading into the year called for flat or slightly negative growth, with JLL and CBiz both projecting just 0.4% growth for 2026 following a 4.7% decline in 2025. The March uptick, if sustained, could signal that federal tax incentives and infrastructure spending are beginning to offset the drag from elevated borrowing costs.

Productivity Growth Disappoints, Stoking Stagflation Fears

The one sour note came from the productivity report, which showed nonfarm productivity grew just 0.8% quarter-over-quarter in Q1, well below the 1.4% consensus and down sharply from Q4's 1.6%. Unit labor costs, meanwhile, rose 2.3%, lower than the 2.6% estimate but still elevated enough to keep wage-driven inflation concerns alive.

The productivity miss is particularly concerning because it undermines the narrative that AI-driven efficiency gains can help offset inflation pressures. Fed Governor Austan Goolsbee recently warned that productivity hype could fuel inflation if expectations outpace reality—a caution that now appears prescient.

With productivity growth slowing and labor costs still rising, the US economy faces a classic stagflation setup: growth is moderating, but inflation remains sticky. This complicates the Fed's calculus ahead of its next meeting, as officials must weigh cutting rates to support growth against the risk of reigniting price pressures.

Dollar Remains Range-Bound as Fed Path Unclear

EUR/USD traded around 1.1677 Thursday afternoon, down from this month's high of 1.1855 but holding above the key 1.1600 support level. The pair has pulled back below its 50-day exponential moving average as the dollar found modest support from the resilient labor market data, but the productivity miss kept greenback gains in check.

GBP/USD hovered near 1.3590, while the dollar index (DXY) traded in a narrow range around 99.50, reflecting the market's uncertainty about the Fed's next move. Analysts expect the central bank to hold its 3.50%-3.75% policy range steady at its June meeting, but the path beyond that remains highly data-dependent.

Fed officials are now split between those advocating for rate cuts to support growth (like Stephen Miran, who dissented in favor of a 25bp cut at the May meeting) and hawks like Beth Hammack and Lorie Logan, who objected to the inclusion of an easing bias in the FOMC statement. The latest data is unlikely to resolve that debate.

What's Next: ECB Decision and US GDP in Focus

Traders will next turn their attention to the European Central Bank interest rate decision, where officials are expected to hold rates steady at 2.00% while contending with their own stagflation risks. Euro area retail sales data released Thursday showed a -0.1% decline in March, slightly better than the -0.3% forecast, but still pointing to weak consumer demand.

Next week's US GDP report for Q1 will be closely watched for signs of how the economy was performing as the Iran conflict escalated and oil prices surged. Economists expect growth to have moderated from Q4's pace, but the extent of the slowdown will be critical in shaping Fed expectations for the second half of the year.

Market Sentiment: Cautious Optimism Amid Uncertainty

For now, forex markets are treading water as traders await clearer directional signals. The resilient labor market and construction spending beat provide ammunition for Fed hawks arguing that the economy can handle restrictive policy for longer. But the productivity miss and slowing growth momentum give doves a case for easing sooner rather than later.

Key levels to watch for EUR/USD include 1.1800 on the upside (a break above would signal renewed dollar weakness) and 1.1600 on the downside (a break below would confirm a deeper pullback). The Relative Strength Index (RSI) has fallen from 65 to below 50, indicating fading bullish momentum, but the pair has yet to trigger a decisive breakout in either direction.

With oil prices still elevated amid ongoing US-Iran tensions and inflation risks tilted to the upside, the Fed's path forward remains fraught with uncertainty. Thursday's data only reinforced that message: the US economy is neither hot enough to justify tightening nor weak enough to demand immediate easing. For forex traders, that means more range-bound volatility ahead.