U.S. Dollar Price Action Setups into CPI Week

U.S. Dollar Talking Points:

• The week opened with tariff fears but that was quickly walked back when President Trump delayed Canadian tariffs for a month. But as we wind down on Friday, the tariff topic is back in the headlines as he has said that reciprocal tariffs, or tariffs on countries to match their tariffs on U.S. products, are soon on the way. This is an opaque matter at this point, but it does make for another weekend of vulnerability as headlines can lead to gaps on the Sunday open.
• The U.S. Dollar held the same support of 107.35 in DXY, even after a fast turn-around on Monday and Tuesday.
• For next week the focus shifts to inflation data and for last week, there were some strong items there. Average Hourly Earnings in the NFP report printed at 4.0% against a 3.8% expectation, and the U of M report showed a massive beat for one-year inflation expectations at 4.3% against a 3.3% expectation.

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The U.S. Dollar continues to dangle on headlines around tariffs and as I had warned last Friday, the Sunday open was primed for pandemonium in USD/CAD as tariffs were set to come into effect last weekend.

USD/CAD responded with a fresh 20-plus year high but that quickly dissipated, and then reversed on Monday morning as Trump delayed tariff implementation for a month. While it sounded like Justin Trudeau wanted to wave the victory flag, Trump’s comments were more pointed, saying that he was hopeful that an economic deal could be reached in the next month. And, as we saw around Trump’s inauguration, that could be reason for USD/CAD bulls to hold on in the event that we do, in fact, see tariffs implemented. Canadian officials have already said that they plan to counter tariffs with a ‘pandemic-like response,’ and that could further punish the Canadian Dollar, which could further pressure inflation rates higher, as we’ve started to see as a product of a weak Canadian Dollar. I used the example in Tesla a couple of weeks ago but, realistically, with an aggressively weak currency that could be made even more weak by a debt explosion to finance a ‘pandemic-like response,’ that inflationary pressure could grow even-higher.

For next week, however, we may be due for a bit more normalcy as it’s U.S. data that’s likely to get the attention. The CPI report on Wednesday is key as data out of the United States has been strong of late, bringing question to whether the Fed will actually be able to cut rates this year.

For equities, there could be a bit of good news/bad news going on there as a weaker CPI report could precipitate USD-selling and given the move in USD/JPY this week, along with a Bank of Japan that’s seeing more and more expectation for continued rate hikes, there could be rationale for greater carry unwind. The global carry trade is, in essence, a form of leverage that drives capital into numerous corners of the market. But, as we saw last summer, that carry trade unwinding can lead to a de-leveraging event that impacts several markets, U.S. large cap tech included, and that can leave a mark on the risk trade.

I’m going to try to parse through those moves while highlighting charts below, with focus on some of the larger USD-related markets.

U.S. Dollar

In the webinar on Tuesday, I highlighted the continued hold of support at prior resistance from the prior week. That level at 107.35 in DXY was the swing-high in 2023, and that set the low in January of this year.

That price was back in-play a day later and it’s held the low for this week, with a stronger bounce taking over on Friday.

On Friday, Trump said that announcements around reciprocal tariffs could come next week. But realistically, we could hear comments on that over the weekend, such as we heard last weekend regarding Europe. Increased expectation of tariffs would be considered USD-positive while walking back on the matter could appear more as a USD-negative, following the script seen last week when DXY gapped-higher at the open and then pulled back as Canadian tariffs were delayed for a month.

US Dollar Weekly Price Chart

EUR/USD

The week opened with a shock in EUR/USD after Trump had opined on European tariffs in the weekend prior. I had touched on this in the Monday article as EUR/USD had started to bounce, but Trump said that tariffs on Europe could come ‘pretty soon,’ while going on to say “they don’t take our cars, they don’t take our farm products, they take almost nothing and we take everything from them. Millions of cars, tremendous amounts of food and farm products.”

With Trump’s Friday comment about reciprocal tariffs, one would have to think that some European countries could be on that list. And weekend comments could similarly lead to a re-pricing event around the Sunday open.

That said, EUR/USD is working with some pretty significant support structure as taken from longer-term charts. I had looked at that in the article on Fibonacci, using a live example in EUR/USD and this puts more emphasis on that 1.0200 level. If that does get taken-out the next logical area to look is the parity level.

EUR/USD Daily Price Chart

USD/CAD

The tariff topic was on full display in USD/CAD over the past week. I had warned of pandemonium on the open in the Friday article on USD/CAD and that’s precisely what played out. The pair spiked up to a fresh 20-plus year high before pulling back, with a strong bearish move developing on the tariff delay announcement on Monday morning.

The pair posed a fast pullback to the same support that was in-play before the inauguration and that’s, so far, held the lows on the pullback. Bears have been pretty persistent though and given that the tariff topic on Canada has been delayed for a month and we’re likely going to see other tariff targets in the headlines, there could be more motivation for longs to close positions. That could bring on a 1.4200 test but in that case I’d be cautious of a bear trap scenario in the pair.

USD/CAD Daily Price Chart

USD/JPY

Even with USD holding a key spot of support this week, USD/JPY has continued to dip and price has pushed below the 151.95 level. U.S. CPI prints have had a strong impact on USD/JPY for the past couple years, and we can see the pullback in 2022 and 2023 taking place after below-expected releases. The breakout on April 10^th of last year happened after an above-expected U.S. CPI print, and then the summer sell-off took over after another below-expected CPI release.

The backdrop here has very much been built by the carry trade, which is driven by rate differentials in each economy. Signs that U.S. rates might be going down could compel carry traders to close positions, especially if there’s expected to be increasing odds of rate hikes or higher inflation out of Japan.

The knock-on effect of this could be wide-ranging, as we saw last summer. The carry trade unwinding could essentially be seen as a de-leveraging event, as risk trades driven by cheap Japanese money and low Japanese rates come out of the market.

So, ideally, I think that CPI data would come out in a goldilocks manner, so as to not evoke fear on either side of the equation; too hot where FOMC rate cuts look less probable but not so cold that a more FOMC cuts get priced-in for this year.

In USD/JPY, it’s the 150 level that I think could mark greater carry unwind.

USD/JPY Daily Price Chart

--- written by James Stanley, Senior Strategist