U.S. Dollar Price Action After CPI: EUR/USD, USD/JPY

U.S. Dollar Talking Points:

• It was another strong showing for the Consumer Price Index out of the U.S., with headline CPI pushing back to 3.0% year-over-year, while Core CPI edged up to 3.3, both beating expectations.
• The initial move was a strong jolt of USD-strength although that’s moderated a bit against the Euro and Canadian Dollar. Against the Yen, however, that USD-strength is still showing vividly. I looked into USD/JPY yesterday and the next major level overhead is the 155-handle.
• While the CPI data was hot, Powell’s comments in front of Congress still seemed to lean dovish, with statements such as “we are close but not there on inflation.” This highlights a Fed that still seems to want to cut rates.
• I’ll be looking at the USD from a variety of angles in tomorrow’s webinar. Click here for registration information.

Inflation remains strong in the United States and there’s now even more question as to whether the FOMC will be able to cut rates later this year. We saw those expectations get pushed back a bit after the release of CPI data this morning, which again showed another increase and this time headline CPI pushed back to the 3% level, which would be the first such instance since it last posted at that level for June (released in July of 2024).

After bottoming at 2.4% in the October release, headline CPI has now gained for four consecutive months and this brings question to whether the Fed will actually be able to cut rates again later this year.

The initial response was violent in both the USD and equities, and both moves have settled as prices have pared back. But, notably the USD/JPY pair has continued to incline and I’ll look at that in a few moments.

U.S. Headline CPI Back to 3.0% YoY

Chart prepared by James Stanley; data derived from Tradingview

USD Initial Rally Pulls Back

The initial response to that USD-strength was a push up to a fresh high, but price has retreated from that already and the daily chart is showing as indecisive.

Notably, that move echoes with a bounce in EUR/USD and GBP/USD; but not as much with USD/JPY which has continued to rally after the inflation release.

For the bigger picture of the USD, there remains a bullish bias as seen from the higher-low that came into play last week. But – this also highlights important support structure that needs to remain in-place to allow that bullish bias to continue. There’s an upward sloping trendline connecting December and January swing lows, and there’s also the 107.35 level of prior resistance that’s held as support so far this year.

The fact that we’ve seen that CPI rally pared back so quickly seems to point to the fact that tariffs may actually be a larger driver of near-term price action right now than anything on the data front. And with Europe potentially in the cross-hairs of President Trump, that theme could have a large bearing on price action in both currencies.

U.S. Dollar Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

EUR/USD was slammed after the open last week as Trump had opined on European tariffs the weekend before. He said that tariffs would be coming ‘pretty soon,’ and while opaque on timing, it highlighted the fact that a tape-bomb could arrive at any moment that could put the single currency under threat. EUR/USD has since recovered from that sell-off but rallies have been short-lived. Last week saw resistance hold at a confluent spot of Fibonacci levels around 1.0400 and the pair sold off into the end of last week and through this week’s open.

At the least, this sets some lines in the sand for near-term strategy but again, there’s the potential for one headline to shift the flow pretty dramatically here.

The 1.0406 level remains notable, and a breach above that opens the door for a test of 1.0457 after which the 1.0533 level comes into the picture.

For support, it’s the 1.0200 level that stands out but that’s been defended pretty well so far after the tariff threat came into the picture as last week started with a higher-low. And so far this week it’s another higher-low as we’ve seen buyers hold above the 1.0284 Fibonacci level.

This could highlight a shorter-term bullish bias although there hasn’t yet been much for higher-highs, and that’s a reason why the 1.0406 level is so important for right now. With that said, if we do see a surprise comment from President Trump on European tariffs, that bullish backdrop could shift quickly.

EUR/USD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

Last week it looked like USD/JPY could be on the verge of a larger case of carry unwind. The pair put in three concerted days of selling in the middle of last week, and it looked as though there could be larger breakdown themes to work with this week.

U.S. CPI has been a particularly large push point for the pair over the past few years and with a BoJ possibly gearing up for more hikes, weaker CPI and higher expectations for more rate cuts out of the U.S. could’ve been a driver of carry unwind themes. And something like that could potentially bring on collateral effects, like de-leveraging across global equity markets, such as we saw last summer.

But – as indication of that theme, USD/JPY is rallying aggressively this morning on the back of the CPI print and making a fast run at the 155.00 handle.

Like I had looked at in the weekend video and the article again yesterday, this could actually be a good factor for equities as carry unwind could be considered a de-leveraging event and the fact that there’s less reason for carry traders to expediently unwind positions, there’s now less fear of that leverage coming out of markets like large cap tech.

The 153.88 level from the article yesterday came in as resistance ahead of this morning’s CPI print, and it’s now support potential for bullish continuation setups in USD/JPY. And for next resistance, it’s the same 155-155.38 zone that I’ve been tracking.

USD/JPY Two-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist