In the last full week of 2020 trading, US stocks hit record highs. This strong performance combined with better than expected data breathed new life into the US dollar on Friday. The greenback ended the day up against all of the major currencies except for the Australian dollar and sterling. However, on a weekly basis, it is not nearly as strong, rising only versus the euro and sterling, falling against the Swiss Franc, Australian, and New Zealand dollars and holding steady against other currencies.

Personal incomes grew more than expected, the personal consumption component of Q3 GDP was revised higher along with the University of Michigan consumer sentiment index for the month of December. These numbers were encouraging enough to drive EUR/USD to its weakest level in more than a week, but even so, it is important to remember the central bank’s cautious outlook, softness in consumer spending, manufacturing activity and decline in home sales. The US economy is not improving as fast as everyone hopes, the central bank has no plans to tighten, although the chance of further easing is slim as well. Trade talks appear to be progressing but investors are skeptical. Considering that everyone is talking about a January date to finalize the Phase 1 US-China trade deal, we don’t expect any significant positive headlines over the next 2 weeks which means that the risk for the dollar is still to the downside although consolidation is the most likely.

Euro was hit the hardest on Friday by anti-dollar flows. While German consumer confidence weakened in the month of January, this was more of a technical break. EUR/USD had been consolidating for 6 days straight and when it dropped below 1.11, selling pressure intensified. The problem for the euro is that while ECB President Lagarde was decidedly optimistic at her first monetary policy meeting, data has not supported her views. This week, we saw manufacturing activity slow, inflationary pressures ease and consumer confidence weakened. While business confidence improved, these and other reports combined with ECB staff forecasts that showed scope for easing was just the excuse that investors needed to sell the currency.

The Canadian dollar also tumbled sharply on the back of weaker retail sales. Instead of rising 0.5%, retail sales dropped -1.2% in the month of October. Canadian GDP numbers are due on Monday and this decline does not bode well for growth. Slower economic activity would be consistent with the central bank’s cautious outlook. USD/CAD turned higher on Friday and could extend its gains above 1.32 in the week ahead.

Sterling and the New Zealand dollars consolidated with the former edging slightly higher after GDP upgrades. The Australian dollar on the other rallied for the third straight day on positive trade developments and this week’s strong employment report. With that said AUD/USD hit the 200-day SMA, which is the perfect place for a pullback.

There are no major economic reports scheduled for release in the week ahead with many markets closed for Christmas and Boxing Day. Therefore, big moves in currencies should be limited.