USD Tests an Important Spot on the Chart After the NFP-Fueled Reversal

USD Talking Points:

• It’s come on quickly but USD weakness hit hard after the NFP report last week, pushed along by rising expectations for rate cuts just two days after the Fed sounded not so ready to cut rates.
• President Trump has pushed the matter aggressively, ranging from his threats to fire Jerome Powell after the CPI rally last week to the multiple comments on the matter since the FOMC meeting last week.
• Paradoxically with inflation on its way back up, a rate cut could actually boost longer-term rates, similar to what happened last year, and that could make mortgages more expensive which would be an impediment to growth ahead of US elections next year.

It’s a loaded argument around the US Dollar at the moment and the matter of monetary policy has almost taken on a political divide. President Trump wants to pump the economy, as his been his tact during his first term and so far through the first six months of his second. Interest rates remain somewhat elevated and so far, the Fed hasn’t seemed ready to cut as they initially said they feared inflation from tariffs, but now can look to actual inflation going up as a warning sign against softening.

To be sure, the rate cuts imposed last year ahead of the election boosted inflation as we came into this year but the Fed didn’t seem very vocal about taking on blame for that. Instead, they pointed to the possibility of supply crunches coming from tariffs as a risk to cutting rates. That hasn’t really seemed to happen, although inflation has went up on its own after elevating at the start of the year, and now there’s a very real risk of a similar scenario as last year.

When the Fed cut rates last year inflation expectations for the future boosted, which then drove longer-term rates higher: Pretty much the opposite of what the Fed expected or wanted. And with the 30-year Treasury bond still trading near 5%, those rates have remained elevated which then puts pressure on markets dependent on rates, of which there are a lot, like mortgages.

Nonetheless the US consumer has just continued to chug along, and that’s helped stocks to remain elevated and near ATHs even as several questions have built around economic forecasts. The Fed didn’t sound ready to cut rates last week as Powell pointed to a seemingly stable backdrop, with inflation continuing to push higher and the unemployment rate remaining low as signs that policy wasn’t too restrictive.

The response to that was a breakout in the US Dollar and that extended the morning after, with release of the Core PCE report that again showed US inflation moving higher, similar to the CPI report from earlier in the month.

But the NFP report the morning after was what Dollar bears were looking for, as a miss in the headline number and a large revision for the prior two months brought with it questions of that employment health that Powell had spoken of not even 48 hours earlier.

US Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD Support Test

The US Dollar is a composite of underlying currencies, with a 57.6% allocation of Euro and 13.6% allocation of the Japanese Yen. So for the USD to continue selling off, it will likely need at least some participation from the Euro and JPY and that’s the big question at this point.

The USD sell-off tested a level of support back in April around the 98.00 level and that led to a four-week rally. From that, resistance played at a Fibonacci level of 102, which then led to a continuation of weakness into the Q3 open as a fresh three-year low was set. But since then sellers have seemingly had a difficult time re-taking control as a higher-low built in July and that brings us to current day, with the question as to whether another higher-low can hold. If so, this makes Fibonacci resistance in EUR/USD as an attractive setup, which would go along with the stalling at a Fibonacci level shown so far this week in USD/JPY.

For USD-weakness, I remain interested in GBP/USD as looked at earlier on the day.

US Dollar Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist