US Dollar Price Action Setups: USD/JPY, EUR/USD, GBP/USD, Gold, S&P 500

USD Talking Points:

• Expectations remain high for at least 25 bps of hikes into the end of the year with a greater than 50% chance that we see that at next Wednesday’s FOMC rate decision. The PPI and CPI prints to be released later this week are key for that meeting.
• USD/JPY remains key for FX markets as the crowded carry trade presents significant USD risk, which can drive through other markets such as EUR/USD, GBP/USD and AUD/USD.
• What should be clear at this point is that both Scott Bessent and the Bank of Japan have unnerved markets and given a theoretical cap to upside, bullish USD/JPY setups at or above 160 present a challenge, as I wrote a couple weeks ago. Now, the big question is whether the pair can bounce into a lower-high and that CPI data point is a big one for several reasons.
• USD/JPY reversals in 2022, 2023 and 2024 were driven more by US CPI than a direct response to intervention, although the latter establishing a line in the sand was a key first step.

The Bank of Japan has intervened multiple times since the spark of the USD/JPY carry trade now more than five years ago. In that time, we’ve seen Japanese inflation flare (and settle down) and we’ve had a stern bout of inflation in the United States that was initially dismissed in 2021, only for the Fed to go on a historic hiking spree in 2022.

Even though the Fed did not hike in 2021, USD/JPY started to gain; and that rally went parabolic in 2022 as the Fed did begin to actually hike as the carry trade took over. After starting 2021 in the 102’s the pair jumped up to the 150 mark in 2022 – a massive move for any market but especially more outsized considering the connotation that this is the exchange rate between two of the world’s largest national economies.

Ever since then the carry has remained tilted to the long side of the pair and that remains the case today. As such, there’s many longs that are still holding on and this derives from both positional trades as well as hedges on underlying carry trades – from banks or hedge funds that borrowed funds cheaply in Japan and then invested those funds. Warren Buffett had done something similar, although he borrowed in Japanese Yen and then invested in Japanese banks.

As long as the rate disparity remains in-place so too can a fundamental bias for the market. But – fundamentals aren’t the only thing that matters as it’s positioning – actual buying and selling and legitimate supply and demand that dominate price movements. And for USD/JPY, it’s US CPI prints over the past four years that have had a massive impact on the matter.

In 2022 when USD/JPY crested above the 150.00 level, the BoJ was ordered to intervene. And that was enough to push prices back to a support test of 145, but like we’ve seen with recent episodes, that merely invited more buyers into the mix as prices bounced in the aftermath. But as price re-approached the 150.00 level, the perceived risk-reward grew less attractive, and while there was still motive for bulls to buy dips, there was less to hold on at that contentious line-in-the-sand that had invited action previously.

What ultimately drove the reversal in November of 2022 was a below-expected US CPI print. Headline CPI was at 7.1% and Core CPI was at 6.3%. And, at the time, there wasn’t exactly thoughts of the BoJ hiking rates so the fundamental bias was very much in-place. But – given the change, the fact that US inflation had started to slow and, perhaps, markets had seen the Fed at their most hawkish, there was enough motive to shake longs out of the trade, leading to a 2,000+ pip sell-off that spanned the next two months.

At this point, we’ve had the theoretical line drawn in the sand with the 160.00 handle but we haven’t yet seen a convincing turn in the data that’s compelled longs to bail. That can change with Friday’s release of CPI data. Until then, there’s a possible counter-trend setup in USD/JPY as the daily bar has shown an elongated underside wick, very similar to what showed a month ago after the intervention push. If the daily bar closes as a hammer or perhaps even as a dragonfly doji, the door opens to a bounce. But more important is how sellers treat that and whether they come in at a lower-high, inside of the 160 level that set resistance a week ago.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD

As looked at in the webinar DXY is difficult to chase lower, at the moment. If the daily bar finishes as a doji that further points to bounce potential given what could be the set up of a higher-low. Next resistance up is around 99.42 for the Dollar basket.

US Dollar, DXY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

I like boring markets. While there may be lower odds of dramatic moves like we’ve seen in  USD/JPY, there’s also a more reasonable backdrop with which to manage risk.

At Thursday’s ECB meeting the wide expectation is that the bank will lift rates by 25 bps. But EUR/USD seems to have already priced that in and, instead, broader Dollar dynamics from the USD/JPY situation are carrying significant weight.

At this point, I still have the pair in support taken from prior resistance and I’m keeping this one aligned for USD-weakness scenarios. Next resistance up spans from 1.1669-1.1686.

EUR/USD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

GBP/USD

GBP/USD may present an even cleaner backdrop for USD-weakness, as there’s a short-term formation that resembles an inverse head and shoulders pattern. The neckline of that formation derives from a prior swing high, at 1.3558 with follow-through resistance at 1.3595 and 1.3620.

GBP/USD Four Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

Gold

Gold took a punch last week and buyers still haven’t been able to take over. Ahead of the Kevin Warsh speech at Jackson Hole I looked into the matter, highlighting pullback potential if markets came away with a bullish read from the speech. Similar setups in ES and Bitcoin did see a follow-through bullish response but gold, so far, has not, as last week produced another lower-low and the bounce from that has been rather flat so far this week.

Nonetheless, buyers can still make a statement here but they’ll need to push above 4435 to establish a short-term higher-high; or else, the look would be for some element of defense on a deeper drawdown around the swing support at 4300 from last week.

Gold Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

S&P 500

While gold didn’t respond positively to the pullback, at least not yet, the S&P 500 has. Last week saw price move down to the key support level highlighted in the above-linked video, and this spans a zone of prior resistance, from around 7632-7642. With Trump and Bessent’s ‘we will grow our way out of debt’ strategy, there’s still motive for bullish biases.

That said, a shocking inflation print later in the week can strengthen rate hike expectations which could drive a pullback in equities, and I would similarly look at that as opportunity for the broader trend until something shifts in the backdrop.

There’s deeper support around the 7500 level which is confluent with the 61.8% retracement of the recent rally.

S&P 500 Futures Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

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