Just a couple of weeks ago the Dollar was looking relatively strong, holding at a monthly high as we moved into the weekend. As I said in the Friday video, I was expecting President Trump to take a swing at the USD as he’s been vocal in his desire for a weaker Dollar, and it wasn’t long after that that ramped up tariff threats on Europe over Greenland had a fast impact on the USD after the weekly open. That led to a decisive sell-off in the early part of last week but it was another matter that took over on Friday, and that’s an item that has continued to drive into today with DXY setting a fresh three-year-low.
This is also a familiar concept and something I had mentioned in that Friday video on the 16th. With both the US and Japan seemingly wanting a weaker spot rate in the USD/JPY pair, it made sense that we could see some force there. That arrived a week later, last Friday, as a Bank of Japan highlighting more rate cut potential drove an episode of carry trade unwind that’s so far driven the USD down to a fresh three-year-low.
Perhaps more impactful is the fact that USD/JPY strength has been a primary component that’s kept DXY holding support over the past seven months, and now with the prospect of even more carry unwind that’s a very big question mark.
US Dollar Daily Price Chart
Chart prepared by James Stanley; data derived from Tradingview
USD Strategy
Chasing oversold fresh breakouts is a difficult way to go about trading strategy but on the same token, there’s a difficult decision on the other side as to whether the move could be faded.
We must respect momentum and if looking for that weakness to continue, there’s a couple of backdrops in EUR/USD and GBP/USD that could possibly be worked with.
In EUR/USD, the pair is similarly at a fresh three-year-high and price has already gotten close to the 1.2000 handle. There’s now support potential around prior resistance of 1.1909-1.1919.
EUR/USD Daily Price Chart
Chart prepared by James Stanley; data derived from Tradingview
GBP/USD
Cable has been the pair I’ve held as a more attractive venue for USD-weakness and it has similarly set a fresh multi-year high on the Dollar’s breakdown this morning. The additional context here is the 1.2000 level in EUR/USD above, which is the type of major psychological level that can be difficult to slide through on the first attempt.
Meanwhile, Cable has so far stalled after that touch of a fresh high and there’s support potential at the prior point of resistance of 1.3728 followed by a zone from 1.3643-1.3683, after which a key zone rests from 1.3534-1.3568.
GBP/USD Four-Hour Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY 151.95
In yesterday’s USD/JPY article I highlighted what I thought was the most important strategy parameter at the time, which was whether sellers would defend a bounce up to resistance at prior support, spanning from 154.45-155.00. That hit cleanly since then and at this point sellers have driven down to a fresh low.
Notably, the high for the session printed right at the 23.6% Fibonacci retracement of the 2025-2026 rally in the pair. That will come into play on the next chart…
USD/JPY Four-Hour Price Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY 151.95
With the pair seeing fresh selling it appears that the unwind scenario is not yet over, at least not yet. As to whether we get a similar backdrop as Q3, 2024 or whether this turns out to be an episode similar to the April-May pullback of that year remains to be seen. The big differentiator of those two episodes is Q3 incident was driven by the prospect of shifting rate expectations. The April-May version was still very much backed by the prospect of continued rate divergence between the US and Japan – and that was very much behind the motivation for longs that had ridden the rally to close positions.
We’ve undoubtably seen at least some squaring up but the big question now is whether there’s motivation for more longs to close.
The next spot of support on the chart is a major one – it’s the 151.95 level that was the high in 2022 and 2023 before yielding to breakout, and ultimately becoming higher-low support before the multi-decade high, at 151.95.
And that price is now confluent with the 38.2% retracement of the recent rally which is related to the 23.6% level that’s so far held the highs.
USD/JPY Daily Price Chart
Chart prepared by James Stanley; data derived from Tradingview
GBP/JPY
If looking to fade this run of Yen-strength the US Dollar can be a tough spot given that both Yen-strength and USD-weakness have shown in a very visible fashion. GBP/JPY, on the other hand, has so far held range support while also showing a higher-low so far in early trade on the week.
If we do see carry unwind continue this pair can undoubtably get hit but, at the least, there’s been a bit of divergence from the USD/JPY setup and at this point there’s some structure that can be argued for bulls in the pair.
GBP/JPY Four-Hour Chart
Chart prepared by James Stanley; data derived from Tradingview
EUR/JPY
EUR/JPY is in a similar spot as the splashdown move on Monday has so far been followed by a higher-low on Tuesday, and there’s also the potential for an indecision candle on the daily, which could set up the first two bars for a morning star formation. If looking to fade JPY-weakness I think this, along with GBP/JPY above, make for a more compelling backdrop. And if looking for JPY-strength to continue, the USD/JPY setup down to a 151.95 re-test could be a more attractive backdrop.
EUR/JPY Daily Price Chart
Chart prepared by James Stanley; data derived from Tradingview
--- written by James Stanley, Senior Market Analyst, Global Macro
