US Dollar Price Action Setups post-CPI: EUR/USD, GBP/USD, AUD/USD

US Dollar Talking Points:

• This morning brought the release of April CPI numbers and headline inflation fell below 5% for the first time in two years, while Core CPI remained sticky at 5.5%.
• The reaction in the USD was weakness with EUR/USD pushing back up to the 1.1000 handle. Tomorrow morning sees the focus shift to the UK with the Bank of England’s Super Thursday rate decision.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

The US Dollar took another punch this morning as headline CPI dropped below 5% for the first time in two years. The currency remains in the range that’s been in-place since mid-April but, notably, bears were unable to get much drive below the 101.30 level that’s towards the bottom of the range, with points of reference below that at 100.82 and 101.05 in DXY.

US Dollar - DXY Four-Hour Price Chart (indicative only, not available on Forex.com platforms)

Taking a step back, it’s the 100.82 level that remains relevant as that price is currently helping to mark the yearly low in DXY. This also sets the stage for a possible double bottom – if it holds. And there’s been a few close calls for a recent test, but bulls have continued to hold the currency above the 101 level over the past few weeks, most recently again on Monday of this week.

Sellers have had ample opportunity given this technical backdrop but, as yet, they haven’t been able to break fresh ground.

US Dollar - DXY Weekly Price Chart (indicative only, not available on Forex.com platforms)

EUR/USD: Relative Valuations

So this morning’s CPI report showed Core CPI sticking at the same 5.5% reading as last month, and the NFP report on Friday showed the unemployment rate at an all-time-low of 3.4%. These are both strong factors for the US economy that, normally, would come along with the expectation for the Central Bank to address that elevated inflation. But, of course, we have a bit of context here given the hastened pace of hikes last year that have led to worries about the banking sector.

But there’s perhaps another factor of relevance when investigating price action related to the matter, as it may be puzzling why the USD could drop after a strong inflation print amidst record-low unemployment.

Because currencies are the base of the financial system – the only way to value a currency – is with another currency. So if you ask someone the value of the Euro they can’t just retort with a clean answer, they need to then ask ‘against what?’ In many cases the assumption is that the question pertains to the major pair, in this case EUR/USD, but for full accuracy, the answer would need to address the proper ‘quote currency’ in the pair.

This is why FX is usually traded in pairs, which illustrates that relative valuation aspect, with the base and quote currency of that specific market. Even DXY is a composite of underlying currencies, with the Euro playing a massive role at 57.6% of the allocation.

So, as USD holds very near key support, EUR/USD remains very near key resistance. I had talked about this context in EUR/USD earlier in the week and after the CPI report this morning, the pair remains in close proximity to that zone.

This morning saw a test of range support around the Fibonacci level at 1.0943, which was followed by a quick jump back-up to the 1.1000 psychological level. And from the four-hour chart below, we can see a similar range in EUR/USD that was looked at in the first chart in this article.

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

Taking a longer-term look at the matter, we can see from the weekly chart where the past three weekly candles have shown some element of indecision, with last week’s doji following the spinning top from the week before which printed after a dragonfly doji.

Some break in this impasse can potentially lead to directional moves in the USD given that heavy allocation of the Euro in the DXY quote.

EUR/USD Weekly Price Chart

GBP/USD: Super Thursday

As EUR/USD stalls at a longer-term zone of resistance, GBP/USD has been showing breakout attempts, with a fresh yearly high set on Monday and then again this morning. In both instances, bulls were stymied shortly after, leading to a pullback, but tomorrow’s BoE rate decision could provide motivation for volatility.

From the daily chart, there remains support potential around a zone of prior resistance that cable spent almost a full month testing ahead of last week’s breakout. This runs from 1.2444 up to the 1.2500 psychological level and if bulls can’t defend that through the rate decision tomorrow, bigger picture reversal themes may soon re-appear. But, if they can, the door can remain open for continuation and there’s another zone of possible resistance sitting overhead that I’ll look at in our next chart.

GBP/USD Daily Chart

Taking a step back to the weekly chart of GBP/USD, and there’s another level of relevance just above current prices, and it’s a confluent level as 1.2750 is a psychological level and 1.2753 is the 61.8% Fibonacci retracement of the 2021-2022 major move. If buyers can finally bid the currency in a sustained break above 1.2667, that’s the next level of interest for bullish continuation scenarios.

GBP/USD Weekly Price Chart

Chart prepared by James Stanley, GBP/USD on Tradingview

AUD/USD

Aussie tested a fresh two-month high earlier today against the US Dollar but was unable to hold above the .6800 level. Taking a longer-term look at the matter and we can see a similar range over the past couple of months as USD has held that longer-term support around 100.82.

Price is at a big spot as of this writing, taken from the 50% marker of the 2020-2021 major move.

AUD/USD Weekly Chart

From the daily chart we can get a better view of that recent resistance test with this morning test of a fresh two-month high. Rounding to nearest big figures would show an approximate 200 pip range, with support around the .6600 handle and resistance around the .6800 level. If bulls can force a break, there’s follow-through resistance potential at the prior swing low around .6872.

AUD/USD Daily Price Chart

Chart prepared by James Stanley, AUD/USD on Tradingview

USD/JPY

USD/JPY has been on a rollercoaster of late, breaking out two weeks ago after the Bank of Japan rate decision, eventually re-testing resistance at 137.68 on Tuesday of last week. And that’s around the time that banking worries came back into the equation with PacWest, which prodded another move of lower Treasury yields, which helped to bring down the greenback and in-turn, USD/JPY.

Support eventually showed at a familiar spot of 133.76, which led to another push up to the 135.00 handle earlier this week.

USD/JPY Daily Price Chart

On a shorter-term basis, the big question now is whether bulls can hold higher-low support. That resistance test at 137.68 now shows two inflections at horizontal resistance, and between the two there’s been the build of a bullish trend, illustrated with the trendline below.

This sets up a possible ascending triangle formation if buyers can hold support. Ascending triangles are often approached with the aim of bullish breakout potential so this would likely be a scenario that has some connection to DXY holding support and showing some element of a bullish reaction.

USD/JPY Four-Hour Price Chart

--- written by James Stanley, Senior Strategist