US Dollar Price Action Setups: EUR/USD, GBP/USD, USD/JPY

US Dollar Talking Points:

• An initial sell-off after the FOMC rate decision found support on Friday as risk aversion took over global markets.
• For next week the big question for FX markets is whether the Euro can show some element of recovery.
• USD/JPY also presents a possible issue as the post-BoJ move saw a pullback and if we are seeing larger risk aversion themes, there’s threat of greater unwind of the big picture carry trade.

By relative comparison the FX market was actually somewhat calm over the past week.  Sure, there was FX fueled volatility coming from a slew of Central Bank meetings, but with none of the major CBs hiking rates this was largely driven by the hints of whats ahead. And on that front, the ECB, Fed and BoJ all seem ready to hike at some point in the not-too-distant future as inflation remains above target.

But one of those big factors behind inflation is something that probably won’t be impacted much by rate hikes, and that’s oil. I talked about this in the Top Five Charts for the Week Ahead video and as we wind towards the end of the week, oil prices remain strong and stock prices have taken a hit. The US Dollar, meanwhile, showed initial weakness after the FOMC rate decision but ultimately found support at a familiar spot of 101.80 as risk aversion took over.

US Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

The Euro has suffered from a crisis of confidence as political volatility in France has spelled economic volatility for the Euro-zone, and with French-German bond spreads widening it further highlights an existential issue with the single currency, one that current ECB President Christine Lagarde has avoided in addressing. She announced that she would be leaving her post a full nine months early and as that news hit ahead of the ECB meeting on Thursday, the Euro began to find footing for support.

The big question now and this is highly pertinent to the USD as the Euro makes up a whopping 57.6% of the Dollar basket, is whether the single currency can show greater recovery which would deductively spell some element of USD-weakness.

That’s a tough trade, at this point, and the sole silver lining would be the stalling that has so far shown around the lows in the 1.1100 area.

EUR/USD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

GBP/USD

In webinars over the past few weeks I’ve shared my opinion that GBP/USD was a much more attractive market for USD-weakness scenarios, and that proved to be the case over the past week.

The 1.3275-1.3300 zone held the lows with both the lower-low at the bottom of the zone and then a higher-low at the top of the zone, which then led to fresh highs into the end of the week. If EUR/USD does start to show some greater form of recovery the bias for USD-weakness could shift but, for now, GBP/USD has the cleaner backdrop for Dollar weakness scenarios given the higher-high after the higher-low.

GBP/USD Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

If you’re looking for something to worry about, there may be a building situation in the Japanese Yen.

The BoJ similarly had a hawkish hold this week, pointing to a possible rate hike in December. But, unlike the actual rate hike last month, Yen bears did not jump at the opportunity and, instead, the pair pulled back very similar to what had shown in the prior week.

This isn’t necessarily doom-and-gloom yet but when one considers the possible reverberations from the unwind of the carry trade, there could be some massive repercussions if we’re on the cusp of seeing a global de-leveraging event hit macro markets. I talked about this in the Friday video on StoneX TV and I’ve linked that below.

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Again, this isn’t reason to doom and gloom just yet as there was a response from a key support level after the BoJ meeting, but the fact that bulls have been unwilling to push up to a 159 indicates waning enthusiasm on the long side of the trade, and given the host of worrisome macro factors that have popped up, this could be indicative of a larger shift of carry unwind.

With the Nikkei pulling back aggressively to go along with the sell-off in tech stocks, a further clearing out of carry trades could remove a lot of leverage that has helped to push those trades for years. And USD/JPY would essentially be a byproduct of that, as unwinding carry trades wouldn’t need their currency hedge any longer. This would be similar to the backdrop that appeared back in July of 2024.

But, for now, there’s still some important support structure in play on USD/JPY. The 156.68 level helped to hold the low in the prior week and then the past week saw support at 156.97. If there is a larger breach, the 155.00 zone still matters, but if that gives way, we could be on the cusp of some new themes across the FX market.

In that event I would expect even EUR/USD to rise and, again, this would be similar to the backdrop from July of 2024.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro