Currency markets remained steady last week. The dollar drifted between new short-term lows and weak rallies and lost ground against most currencies. Inflation in the U.S. has peaked. CPI and PPI have both trended lower over the last several months. The Fed will likely raise at the next Fed meeting (February 1) but only 25 bps. The markets are selling dollars, looking for both yield and safety. The yen, for example, has sustained a strong rally against the dollar for both safety and future rate hikes in Japan. Data in the U.S. is light in the week ahead. Durable Goods, Housing numbers, and Personal Consumption Expenses (PCE) are the major releases. Remember that the Fed focuses on the PCE; any surprise may impact the dollar.

EUR (1.0900): The single-currency is making new highs on its current rally. Now that it has moved to 1.0900, the next significant level is 1.1000. The euro rally will stall near 1.1000; if it fails, we expect it to fall back to 1.0750. This failure will not end the rally; simply a setback. The move toward 1.1500 will negate last year’s dollar rally.

GBP (1.2440): The main driver behind the recent sterling strength has more to do with its volatility against the euro than the U.S. dollar. 0.8800 to 0.8540 is the current range over the last several months. Currently, the EUR/GBP is dealing at 0.8760, bouncing (EUR higher v. GBP), which has kept the sterling lagging in the rally against the U.S. dollar. The resistance level at 1.2500 has held for several months, but it is in danger of giving way. The target will be 1.3000. Support for the GBP/USD is at 1.2250, followed by 1.2000.

JPY (129.30): Demand for the yen continues to build. The change in the BoJ’s interest rate policy has taken some of the “carry” out of the carry trade. Selling yen (borrowing) has dominated trade for some time, but this central bank change has the existing short yen positions getting covered at a quick pace. 125.00 is the target for this move. USD/JPY will now be a focus in the FX markets. Further changes by the BoJ will keep the market ready to buy more Jpy and sell USD.

CAD (1.3375): Oil prices are moving higher, currently at $81.00/bbl., and the Canadian dollar is moving higher as expected. Both factors will weigh on the U.S. dollar and keep the Canadian dollar moving in this direction. The BoC has a rate meeting this week and the market expects them to do a 25 bp hike. 1.3220 will be a crucial level of support. Below that, the next area of support is at 1.2750. Oil above $85.00 will open USD/CAD to fall to 1.2250.

MXN (18.8700): Last week’s low of 18.5600 matched the low from February 2020. The bounce to 19.1000 was quick and cleared out some of the short-term positions. The fall in USD/MXN will continue. This is why we always suggest buying pesos in the forward market on any significant weakness. The move last week back above 19.0000 was a great opportunity. Resistance is now 19.10-19.20.

CNY (6.7740): The support area of 6.6500 held last week, and the dollar bounce to the current level happened quickly. Now we have two considerations. Has the PBOC decided that the CNY’s quick rise to 6.6500 is enough strength in a short period, or has the market gotten concerned that there will not be a full opening of the Chinese economy? Although difficult to measure, these two factors may explain the recent activity in USD/CNY.