The dollar surged late last week on what was a surprisingly blunt speech by the Fed chair, Jerome Powell. The much-anticipated Jackson Hole Economic Forum, and specifically the speech delivered by Powell, clearly spells out the plan for continued rate hikes (possibly at a slower pace) until inflation moves back toward a comfortable level. This level has always been 2%, but with the current level at 40-year highs, the 3-4% area would be a more sensible target. The key U.S. 2-year yield is moving much higher, and quicker than the longer end of the curve. The correlation between the 2-year and the USD is very high and this should be supportive of the dollar, which is negative news for most foreign currencies. EUR, GBP, JPY and CAD are all at key support areas and once those give way there will be another leg down for those currencies.  

This week the markets will focus on adjusting to Powell’s comments, and Friday’s U.S. employment situation.  

EUR (0.9930): The euro had a reversal of sorts last week. Several times the single-currency tried to rally through 1.0100, but failed, with the last rally resulting in a reversal to the current 0.9930 area. Once this support level is given, the next level to target 0.9800. We still believe that the larger target is 0.9500. Rallies should be sold against 1.0100 and 1.0250. 

GBP (1.1675): The pound opens this week under pressure against the euro and the dollar where this weakness is no doubt a result of the Powell comments in Jackson Hole. The Bank of England was the first central bank to raise their interest rates and they are poised to continue but against the Fed’s message the rate advantage remains with the US dollar. High natural gas prices keep the U.K. economy on alert for the expected jump in costs and depending on how long these high prices continue the pound will remain under pressure. Next levels to keep an eye on are 1.1400 and then 1.1000.  

JPY (138.50): The last four weeks have had USD/JPY trade to 140.50, then 130.38 and now back up! Each of these large moves are a reaction to Fed expectations of future rate moves. Now that the Fed has signaled a more aggressive stance, the spread between U.S yields and those of Japan will continue to widen, favoring the dollar. The first level of resistance is 140.50, followed by 142.50 and 144.25.  

CAD (1.3050): USD/CAD has rallied to the previous high levels that have provided resistance. The target for this rally is 1.3350/1.3400. Oil prices continue to remain between $90-$95/bbl, putting this variable on the sidelines, while the currency pair adjust to the higher U.S. rates. The BoC has been as aggressive as the Fed, resulting in a relatively stable currency pair. That should continue for some time.  

MXN (20.1000): USD/MXN, like all USD currency pairs moved higher, again finding the support zone of 19.5000-19.8000 as too strong. The dollar should continue to move higher, with 21.0000 and 21.5000 as the peak of any rally.  

CNY (6.9000):  The Chinese economy has slowed, the PBOC has cut interest rates and the U.S. and other major economies are raising them. Together these are pushing CNY toward 7.000! As the currency weakens, their exports become cheaper and that will help their growth story.