Greenback surges on strong US economy data

Sterling takes worst hit in a month on election poll. Euro sell off aided by weak EU economy readings. EUR/USD set to test critical support around $1.10.

The US dollar rallied against most major pairs Friday on the back of buoyant reports on the US economy, and in the case of the euro on data showing the eurozone is hovering near recession.

EUR/USD broke out of the week’s very tight trading range to the downside after news in morning New York trade showed business activity in the US picking up. Economics firm IHS Markit released its closely watched services and manufacturing indexes for November, one of the first glimpses into US economic activity so far this month.

IHS Markit’s services activity index readings – services account for more than 75% of economic activity - are now at four-month highs, while the manufacturing index showed that this sector seems to be rebounding sharply from US/China trade fight setbacks, with readings at 10-month highs.

Euro rally quashed

EUR/USD had been rallying since late last week and by Wednesday was attempting to break through minor resistance around $1.1090 but failed to do so. After trading in a very narrow range around $1.1075 later in the week, the greenback caught a strong bid Friday morning trade on the US data.

Adding to the Euro’s woes Friday was another report from IHS Market showing the eurozone economy is barely growing, with its purchasing managers index for November coming in much lower that expected at 50.1. A level below 50 indicates contraction.

Strong US data and weak eurozone data was a double whammy for the EUR/USD, which fell about 50 pips Friday – by far the biggest one-day move of the week - and was trading around $1.1020 late in New York.

It looks like the greenback may test critical resistance against the Euro around $1.10. EUR/USD has been trading in a rough range of $1.12 to $1.10 since early October, and any meaningful break below the key $1.10 level would be a big blow to Euro bulls, who would have to reassess their near-term view of the market in such an eventuality.

Election polls hit sterling

GBP/USD had its worst day in a month after polls released Friday revealed eroding support for Prime Minister Boris Johnson’s Conservatives. Polls showed the Conservative lead over Labour narrowing sharply to ten percentage points from earlier surveys showing a lead closer to twenty percentage points.

Sterling fell against the greenback by the most in a month on the news, the biggest fall in the major pairs on Friday. GBP/USD was off by more than 80 pips late in New York, trading around $1.2835, the lowest levels of the session.

If you listen to influential US investment bank Goldman Sachs, Friday’s Sterling action was a buying opportunity. Goldman issued a report late in the week calling long GBP/USD as one of the best trades of the upcoming year.

Sterling is by a long shot the best performer of the major currencies this quarter, up over 6% on hopes of greater certainty around Brexit outcomes. Prime Minister Boris Johnson was able settle thorny Irish issues and reach a deal with the EU, but that deal was unable to pass parliamentary muster, hence the election in early December.

So, the reality is that Brexit uncertainty is as high as ever, and long Sterling has by far the biggest political risks of any of the major pairs. In fact, ever since the UK voted for Brexit, sterling valuations have pretty much been a function of market assessments of the political risks surrounding the deal.

After getting hammered in recent years on Brexit, the pound has been undervalued on fundamental economic basis, a development that has investors and traders salivating, eager to catch the big move that moves the currency back to fair value.

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