USD into a Big Week with Powell and CPI: EUR/USD, USD/JPY

 

 

Euro, USD Talking Points:

• The CPI release on Wednesday of this week should be a big driver for FX and USD volatility, but the Humphrey Hawkins testimony beginning on Tuesday could also be important.
• To this point there remains a but of uncertainty around the relationship between Chair Powell and President Trump, and Powell has side-stepped questions on the matter in recent FOMC events. But tomorrow, he will come before Congress and may find the questioning more difficult to avoid. And it raises the question of how the Fed chair plans to handle possible tariffs and new economic policies of the administration.
• I’ll be looking into the US Dollar from multiple vantage points at tomorrow’s webinar, Click here for registration information. 

It’s a big week for the U.S. Dollar, and the CPI release on Wednesday morning is an obvious item. That data point has had a large impact on USD/JPY, helping to drive three different bearish reversals in the past couple years along with the 151.95 breakout last April, and it’s on display this week.

But before we even get there an opaquer driver shows up and that’s the start of Chair Powell’s two-day testimony in front of Congress. Normally, it’s day one where all the fan fare takes place. But given that we’ll get CPI data the morning of day two, there could be some points of interest in the second day, as well.

The FOMC rate decision in November took place just a couple days after the election and Powell was pointedly asked whether he planned to step down as Trump took over. He was curt, but he responded that he was not and he didn’t seem open to further elaboration. At the last rate decision in January, he was again asked about his relationship with Trump and he directly said that he didn’t want to comment on the matter.

He may find that a more difficult prospect this week as he’ll be questioned from both sides of the aisle. This isn’t a situation where I’d expect Powell to say anything wildly out of the ordinary, but the questioning around how the Fed chair plans to deal with tariffs, if and when they do come online, could sway USD flows. Also of pertinence is the fact that inflation has remained quite elevated, with last month’s CPI print seeing headline CPI make a move back towards the 3%-level. The 2.9% year-over-year reading is far above the 2.4% that had printed in October, just after the Fed started their cutting cycle. And it begs the question as to whether the Fed will be able to cut rates again in 2025, which markets are currently expecting to happen later this year.

And perhaps the bigger effect on the U.S. Dollar is the thought of tariffs. Trump has said multiple times that more news on reciprocal tariffs is coming this week, and again, on the weekly open, many USD pairs showed large moves with Dollar-strength pricing in. This is particularly important for Europe and the Euro, as tariffs levied on Europe could have a bearish impact on the single currency and a bullish impact on the U.S. Dollar.

At this point, the USD continues to rally from the same support looked at last week, and this was taken from prior resistance that set the highs back in 2023. This plots at 107.35 in DXY.

Notably – that price has helped to hold the lows for the past three weeks, and last week’s candle showed a higher-low while finishing as somewhat indecisive, taking on the look of a spinning top formation.

 

U.S. Dollar Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

 

US Dollar Shorter-Term

 

The USD chart gets a bit messier on shorter time frames but last week was very much cut-and-dry, with the early part of the week showing weakness following the spike at the open (driven by comments around tariffs), until 107.35 came into play on Wednesday, leading to strength into the end of the week.

But – from that we can see that it’s the 107.35 level that bulls need to defend this week to retain control of the trend, and there’s even a trendline connecting December, January and February lows that remains in order.

As for fundamentals, Powell sounding less-dovish at his testimony tomorrow, followed by headline CPI hitting a 3-handle could do it (current expectation that I’m seeing is 2.9% for year-over-year headline CPI on Wednesday).

 

U.S. Dollar Daily Price Chart

 

Chart prepared by James Stanley; data derived from Tradingview

 

EUR/USD

 

Back to opacity of drivers, the backdrop for EUR/USD seems highly dependent on how or what Trump comments regarding tariffs. This is an unpredictable matter but, Trump has said that tariffs are coming on Europe ‘pretty soon,’ so it would seem remiss to try to avoid it as a driver.

But what is clear is disparity between European and U.S. economies and if we do see tariffs implemented or even discussed, that could have a further negative effect on European fundamentals. This is likely why we saw such a violent move on the open last week, when Trump had opined on the matter in the prior weekend.

But, like we saw in the USD, after three days of EUR/USD strength (and USD pullbacks) the final two days showed the opposite.

For EUR/USD, perhaps more importantly, has been the defense of a longer-term level of support at the 1.0200 handle. I published an article last week on Fibonacci analysis and I had highlighted this setup in EUR/USD as an example of confluence. That price has so far been defended – but then sellers held another confluent spot of Fibonacci interest last week, around the 1.0400 level.

If 1.0200 does give way, the next obvious level of interest is the parity handle in EUR/USD. And at that point, the big question would likely be whether DXY bulls can sustain trend over the 110 handle.

 

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

 

USD/JPY

 

I’m considering this more of a macro matter but if we do see higher odds of U.S. rate cuts, which normally would be construed as risk-positive, this time may have a counter-active effect due to the carry trade.

We saw this late last summer, when USD/JPY was unwinding and that led to a global de-leveraging event. By the time we got into August the Bank of Japan had started to back away from more rate hikes, and it took a couple of months but, eventually, the trend settled, and USD/JPY held above 140.00 for much of the time after trading over 160.00 in July.

And while many proclaimed the carry trade to be back, rate divergence continued to narrow between the U.S. and Japan in Q4 as the Fed kicked off a cutting cycle. And so far this year, that’s only continued as the Bank of Japan has hiked rates and Japanese inflation has remained elevated.

The carry trade has been an important driver across global markets as it’s essentially a form of leverage, where funds and investors can borrow money at cheap rates in Japan, and then invest it elsewhere where rates are higher. That can help to drive flows into the long side of USD/JPY as those investors look to hedge their Yen risk, and from the retail side, there’s the opportunity to earn rollover for being long the pair given the rate differentials between the two economies.

This can fast lead to a one-sided trade and one-sided trades can unwind very quickly when then wind begins to shift in a different direction. Of late, this has happened around US CPI on more than a few occasions.

The large reversal moves triggered in November 2022 and 2023 both happened on the day of a below-expected CPI release, as did the sell-off that started last July. And in April, when the pair finally broke above the 151.95 level, that happened after an above-expected CPI print drove the thought that the Fed may not be able to cut rates in 2024.

 

USD/JPY Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

 

USD/JPY and Crowded Trades

 

The analogy of a being in a crowded theater, and starting to smell smoke comes to life in the USD/JPY example. As the carry trade can lead to a crowded, one-sided move, the simple whiff of change can compel a counter-term move and that can lead to a fast and violent sell-off.

That’s what showed in both 2022 and 2023, and then again last summer. But the question now is whether the U.S. CPI print on Wednesday will indicate that the Fed will be cutting more or quicker than expected, as the Bank of Japan hikes more or faster than previously expected. That rate divergence could further compel carry unwind in USD/JPY and the 150.00 level seems an important spot here, as this is what had helped to hold the highs back in 2022 and 2023 before, ultimately, bulls were able to run a breakout above 151.95 at the top of that zone in April of last year.

If that price is taken-out in USD/JPY this week, there could be a domino effect should larger carry unwind themes take-over. That backdrop would also likely make it easier for President Trump to talk up tariffs on Europe as there wouldn’t be the additional fear of driving USD-strength.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

--- written by James Stanley, Senior Strategist