The US dollar traded higher against most of the major currencies on Friday thanks to better than expected economic data. Consumer spending rose 1.9% last month, more than two times the market’s estimate. Excluding autos, demand rose 1.5% compared to a 0.4% forecast. Despite high unemployment and less jobless benefits spending rose for the fifth month in a row. With clothing and accessories leading the gain, part of this increase can be attributed to delayed school re-openings. However, the data also justifies the decisions by Governors to keep their economies open even as more than 20 states set records for new coronavirus infections.

The big question now is what the holiday shopping season will look like. The overall level of demand will certainly be lower this year compared to last but if states keep businesses open, providing Americans with a sense of normalcy, demand could remain strong as consumers tap into their savings. In our opinion, the improvement in consumer sentiment was more of a surprise given the growing election, fiscal stimulus, and coronavirus uncertainty. On this point, the overall strength of the stock market is playing a major role in supporting sentiment. With less than 3 weeks to go before the US election, the main focus continues to be on stimulus talks and any unexpected policy announcement or policy threats from President Trump. Keep an eye on the headlines because that will be the leading driver of dollar flows. We expect limited gains for USDJPY and a general reduction in exposure or risk ahead of the election that could drive the dollar higher against other currencies.

Meanwhile, the October 15th Brexit deadline set by Prime Minister Johnson passed with no agreement. According to an EU spokesman talks ended with Johnson telling his nation to prepare for a no-deal Brexit. In light of this, the strength of sterling is remarkable. GBP traders are clearly hoping that won’t happen and negotiations will continue for the next few weeks. The EU’s von der Leyen confirmed that their team will return to London next week to intensify negotiations. Yet Johnson is reluctant to deal and taking a hard stance by saying there’s no point continuing talks unless there’s a fundamental change in the EU’s position. With the risk of a no-deal Brexit growing, coronavirus cases exploding and London hit with new restrictions, GBP/USD should be trading much closer to 1.28 than 1.30.

Euro is also destined for further losses against the dollar with coronavirus cases surging across the Eurozone. In Italy, new coronavirus cases hit a new record high for the third day in a row prompting the government to shut schools in the southern Campania region. It may not be long before cases top 10K a day. In France, more than 30K new virus cases were reported on Thursday. If cases do not stabilize quickly, a full lockdown may return. For now, the outlook for the Eurozone is grim and it should only be a matter of time before EUR/USD falls to 1.16. October PMIs are scheduled for release at the end of next week – softer numbers will strengthen the case for ECB easing before the end of the year.

The Australian dollar extended its slide while the New Zealand and Canadian dollars traded higher. AUD has been on its backfoot throughout the week as RBA dovishness was reinforced by weaker labor data. In contrast, manufacturing activity grew at a faster pace in the month of September as the PMI index rose to 54 from 51. Although, Canada reported weaker manufacturing sales the recent labor market improvement paves the way for stronger Canadian retail sales next week.