USD/JPY, USD/CAD, AUD/USD Outlook: US Dollar Rallies on Tariff Pause

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US Dollar Rebounds on US–China Trade Breakthrough

I felt like a lone world these past few weeks, calling for a bullish US dollar reversal amid a slew of bearish dollar headlines. But when prices refuse to go down on bad news, it leaves them vulnerable to bounce on good. And positive headlines from US-China headlines proved to be that good news.

Talks in Geneva marked the first high-level negotiations between the US and China during Trump’s second term. After two days of discussions, a joint statement confirmed that the US had reduced tariffs on Chinese goods from 145% to 30%, while China lowered tariffs on most US goods to 10%.

Safe Havens Dumped as US Dollar Surges and USD/JPY Posts Biggest Gain in 5 Years

Traders threw safe havens overboard, with gold falling -2.8% alongside bond prices—sending yields higher during a risk-on session. The Japanese yen (JPY) and Swiss franc (CHF) were broadly lower, while the US dollar was the strongest FX major on the day. USD/JPY rallied 2% in its best session in over five years, EUR/USD fell for a fourth straight day to reach my 1.11 downside target, and USD/CAD hit my 1.40 upside target.

US Dollar Index (USD) Technical Analysis:

With just one day of the week down, the US dollar index looks on track to close higher for a fourth consecutive week. A retest of the 102 handle and the 38.2% Fibonacci retracement level at 102.27 is well within reach, although Monday’s high stalled at trendline resistance on the daily chart. With US CPI data looming, the dollar’s upside may be limited during today’s Asian session. And if inflation prints softer than expected, we may see some profit-taking from bulls and a modest pullback unfold.

Ultimately, the Fed may have more room to signal cuts with a trade truce in motion between the US and China. And that could allow the US dollar to embark on its next leg lower, once the current ABC retracement has run its course.

Major FX Technical Setups: USD/JPY Breakout, USD/CAD at 1.40, and EUR/USD Weakness

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

The 2% rally on Monday was its best performance for USD/JPY in over five years. It produced a convincing breakout above trend resistance, with a move to 150 or the 200-day SMA (149.65) seemingly now on the cards.

USD/CAD Technical Analysis: US Dollar vs Canadian Dollar

The Canadian dollar weakened for a fourth straight day, allowing USD/CAD to rise into the 200-day simple moving average (SMA) and test my 1.40 upside target. While the candle is not technically a spinning top doji—given the open-to-close range is slightly wide—its large daily range, with roughly 50% comprised of wicks, signals a degree of indecision below 1.40. I'm therefore on guard for either a period of consolidation or a minor pullback before a potential break above 1.41 and move towards 1.42.

EUR/USD Technical Analysis: Euro vs US Dollar

The euro is down 4.4% from its April high, and there’s no immediate threat of a swing low forming on the daily chart. That said, support has been found at the 50-day simple moving average (SMA) at 1.1079 and the 1.11 handle, so perhaps prices can consolidate briefly before heading towards my anticipated target around the 1.10 handle and the weekly volume point of control (VPOC) at 1.0973.

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

The Australian dollar formed a bearish outside day on Monday, to mark the most volatile day for AUD/USD in a month. It looks like it wants to hold above the 0.6334 low for now, but a break of it is favoured for a run down to at least 63c, a break beneath which brings the HVN into focus at 0.6218. Keep in mind that we’re likely heading towards an RBA cut next week, and given its strong bounce this could leave some downside potential for bears over the near term as traders price in central bank easing.

Economic Events in Focus (AEST / GMT+10)

It’s debatable how much weight incoming economic data carries this week, given the positive news flow from US–China trade talks. For example, US small business sentiment is likely to be gloomy—but already outdated.

The US dollar is clearly enjoying its rebound, as traders price out the odds of an economic collapse in the United States. While this likely reduces inflationary pressures and helps the Federal Reserve (Fed) build a case to cut rates, the USD had been under intense pressure due to the expected economic fallout from Trump’s trade war. We’re now waiting for the market to reach equilibrium between these opposing forces, which could still allow for some near-term upside.

US CPI data is the main event—and it could carry more weight if another soft print arrives, as traders now seek any scrap of evidence that Fed cuts are coming.

10:50 – Bank of Japan (BOJ) Summary of Opinions
10:30 – Australian Consumer Sentiment (Westpac) (May)
11:30 – Australian Business Confidence (NAB) (May)
16:00 – UK Average Earnings, Claimant Count, Employment Change (Apr)
19:00 – German ZEW Economic Sentiment (May)
20:00 – US NFIB Small Business Optimism (Apr)
22:30 – US Core CPI, Real Earnings (Apr)
01:00 – BoE Gov Bailey Speaks, BoE MPC Member Pill Speaks

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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