A reversal in the dollar has caught the attention of the dollar bulls! The Fed’s Powell said that the transitory inflation from the opening economy may lead to a more inflationary long-term issue which suggests the Fed may be moving rates higher earlier than expected. Add St. Louis Federal Reserve Bank President, James Bullard’s (non-voting member), comment about seeing more inflation than he and other folks had expected, could lead to a rate hike late next year. Together, these comments pushed equities lower and a rush into U.S. treasuries led to yields falling and the dollar pushing higher against most currencies (the yen was the exception).

This move left the yield curve much flatter than it had been. Why does this matter? Since the end of WWII every major recession was preceded by a flat or inverted yield curve (short-end higher than the long-end). Today, with the Fed keeping the short-end artificially low, the curve has not responded to the “ebb and flow” of real economic activity. Once the Fed takes off the break by raising rates, market forces will price the curve.  To read more about this, check out this article:  Predicting Recession Probabilities.

The U.S. has more data this week which will help in determining the strength of the economy. Housing starts, Markit manufacturing PMI, new homes sales, durable goods orders, GDP, PCE price index, personal income and spending and finally, Michigan consumer confidence.

EUR (1.1860): The EUR experienced relentless selling last week punctuated by Friday’s fall from 1.2108 to the current 1.1860. This sets up an early test of support at 1.1765, 1.1700 and major support at 1.1600. For GreenShootsFX clients that need to purchase EUR, should be looking to do it this week. Part of a risk management program is flexibility which is something that many treasury departments may struggle with. Currency markets are fluid, they do not go up or down in a straight-line. Therefore, having the flexibility to purchase a cheaper currency for future needs is important. Utilizing your GreenShootsFX EUR account or forward contracts is a terrific way to take advantage of this cheaper currency.

Economic reports: German PMI reports, Euro-zone PMI reports, IFO-German business climate index, German consumer confidence

Resistance: 1.1920, 1.2000, 1,2100; Support: 1.1825, 1.1765, 1.1700

GBP (1.3785): Like the EUR, GBP fell hard last week and has not shown any signs of recovering in the early part of Asian opening. A major trendline which began in May of 2020 was broken on Friday. The next major level to focus on is the 1.3668 low in March and April. Below that is 1.3500. We will be looking at the “double top” if 1.3668 is given. This could push the GBP all the way back to 1.2900!

Economic reports: CBI industrial trend orders, BOE rate decision

Resistance: 1.3830, 1.3860, 1.3900; Support: 1.3720, 1.3668, 1.3520

JPY (110.05): Strangely, the yen was the one currency that did not fall against the dollar last week. The 10-year yield on the interest rate (1.44%) fell last week which would normally drag down the dollar. But the power of the greenback rally overcame that leaving yen unchanged. 111.00 remains a level of interest for any rally with the dollar having a key support line at 109.50. Yen may be one of the more interesting currencies to watch for the rest of this year.

Economic reports: No reports

Resistance: 110.50, 111.00, 111.25; Support: 109.75, 109.50, 109.20

CAD (1.2450): GreenShootsFX has been calling for a dollar rally against the CAD for several weeks and last week’s rally was relentless. It also is representative of how currencies change direction! We were looking for 1.2300 as the target, but this move above the long-term trendline has been surprising. The correlation between oil prices and the CAD could not slow down the USD rally. Further strengthening is expected as the week opens, target 1.2600. Buyers of Canadian funds should be buying at the current level, adding as the dollar rallies. Oil prices remain above $70/bbl and is expected to move higher, therefore the Canadian should gain but this short-term weakness offers an opportunity.

Economic reports: Retail sales

Resistance: 1.2480, 1.2525. 1.2600; Support: 1.2420, 1.2385, 1.2340

MXN (20.65): The peso took a beating last week, but we cannot say any worse than any other currency. Long-term trend line resistance gave way at 20.45 and now the peso is in a difficult spot with the next important level at 21.65. We have been stressing the importance of buying pesos for local expenses and this weakness gives better levels and improves the average of existing hedges. We have seen dollar rallies like this before, only to watch them fizzle, so stay focused on the plan to buy pesos.

Economic reports: Half-month inflation, IGAE economic report

Resistance: 20.95, 21.65, 22.00; Support: 20.25, 19.65, 19.50

CNY (6.4600): The PBOC was happy with the dollar strength last week. The weakness in their currency was welcome following the change in their announcement a couple of weeks ago which was to order banks to increase foreign holdings. We are now thinking about more influence by the PBOC, potentially pushing the currency back toward 6.65.

Economic reports: no reports

Resistance: 6.5000, 6.5500, 6.6000; Support: 6.4500, 6.4000, 6.3500