U.S. Dollar Talking Points:
- Yen-strength has continued through the week’s open and that furthers a move that started with USD/JPY gapping down through the start of trading on Sunday.
- In last Tuesday’s webinar I warned that I expected Trump to threaten Powell’s position atop the Fed as USD-strength had held from the CPI report. That showed up a day later and since then USD bulls haven’t been able to re-take control of the currency.
- The next major driver is the FOMC rate decision next Wednesday and there remains fanfare around the Powell topic, as he’s now been referred to the Department of Justice by a sitting member of Congress. With four meetings remaining in the year and two 25 bp cuts expected, the big question is whether the Fed uses next Wednesday to open the door to a move in September.
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Last week in the webinar, during the section around stocks, I shared my expectation that President Trump would threaten to fire Jerome Powell. This was largely in response to the USD rally that had taken-hold from the Q3 open, which had extended in the aftermath of the CPI report earlier that morning. With inflation pushing higher the prospect of rate cuts from the Fed looks less and less likely, and that’s not to mention the general opinion from many Fed members that tariffs could produce even more inflation. So, with the USD rallying, I estimated that President Trump would go back to a familiar strategy of threatening to replace the head of the FOMC, which markets would then read as a higher probability of dovish policy to suit the President’s aim.
When the threat was levied a day later the USD hurriedly sold off and stocks bounced from a sell-off that started the day before with the CPI release. Trump did walk that back shortly after, allowing for a bit of recovery in the USD, but since then there’s been continued hints at a post-Powell Fed and there’s even been a referral to the Department of Justice to investigate Jerome Powell for lying under oath. Oh, and also there’s been several pointed accusations around the ongoing build-out of the new FOMC office in D.C., which has only served to keep the topic in the headlines.
In response the USD is selling off from the 98.98 level which is the 61.8% retracement of the 2021-2022 major move. Notably, the 50% mark of that same setup is what caught the highs in May at the 102.00 level in DXY.
U.S. Dollar Daily Price Chart
Chart prepared by James Stanley; data derived from Tradingview
GBP/USD
In that webinar last week, even with the USD breaking out, I didn’t want to take an imbalanced approach in the Dollar. I had looked at a setup in GBP/USD for USD-weakness scenarios and so far, the structure from that has held well.
The support zone that I looked at then was from 1.3395-1.3414, and that held the lows on Wednesday before leading into higher-lows on Thursday; and now that we have another push from USD-bears, GBP/USD is testing a breakout at the 1.3500 level.
GBP/USD Four-Hour Price Chart
Chart prepared by James Stanley; data derived from Tradingview
EUR/USD
EUR/USD is currently testing a resistance level at the price of 1.1748, which is the 78.6% Fibonacci retracement of the 2021-2022 major move. This was resistance-turned-support-turned-resistance again around the Q2 close and Q3 open, and the move spark from support at the 1.1686 level which is the 76.4% retracement of the same major move.
As shared in the webinar, if we’re to see USD-strength on its way back, this is still my major FX market of choice, and a hold of that resistance or the 1.1788 level would be a key first step for setting up bears.
EUR/USD Daily Price Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY
USD/JPY remains a massive macro item as the pair remains a little more than 40% above early-2021 levels, driven by the carry trade which served as a form of global leverage.
With indications of USD-weakness, particularly if President Trump is going to fire Powell in order to get a more-dovish Fed Chair installed, there could be motivation to unwind that carry trade which could bring on a risk-off move, similar to what showed last July. So far this week there’s been two harsh days of selling in USD/JPY after last week’s breakout failed. But, I still have a couple of key supports in-play at 146.54, 145.92 and then the major psychological level of 145.00.
If bears can sink below that, there may be signs of a larger tilt of USD-weakness, with both 142.50 and 140.00 as significant levels sitting below that more recent support structure in the pair.
USD/JPY Daily Price Chart
Chart prepared by James Stanley; data derived from Tradingview
--- written by James Stanley, Senior Strategist
