USD Drop Drives EUR/USD to Resistance, USD/JPY Support Bounce

US Dollar Talking Points:

• It’s so far been another bearish week for the USD as the reversal from last week that started around the threat to fire Jerome Powell has continued.
• USD/JPY started the week with a sell-off but notably remains well above prior April lows, even as DXY has pushed very close to the three-year lows established just a few weeks ago.
• EUR/USD has tested a spot of resistance after the ECB meeting and that pair remains vital to directional USD strategies.
• The FOMC rate decision is on the schedule for next Wednesday and the big question is whether Powell and the Fed will relent enough to signal rate cuts on the way. The market is currently looking for two 25 bp cuts and there’s only three meetings remaining in 2025 after next week’s announcement.

USD bears have continued to drive following last week’s reversal on the heels of President Trump’s threat to fire Jerome Powell. The Fed has been in blackout this week and that will remain the case until next Wednesday’s rate announcement. There’s no updated projections or guidance for this meeting, so the push-point will be the bank’s statement and the press conference from Jerome Powell.

So far, Powell has seemed to be averse to talking up rate cuts, much to the chagrin of the current U.S. President. While he’s continued to say that inflation potential from tariffs remains a concern, there’s also the response to inflation from last year’s rate cuts that still looms large. Powell hasn’t talked much about that, however, and instead has shifted the attention to the projection of inflation on the basis of supply disruptions due to tariffs, which has been difficult to find in the data, so far. This has made the bank and Powell a lightning rod for attention, and as I said in the webinar after the CPI report the week before last, it wouldn’t surprise if Trump again threatened to fire Powell for not having softened rates. That threat arrived a day later and it’s helped to produce a pullback in the bullish theme that started around the Q3 open.

As of current, there’s been a 61.8% retracement of that rally, but more notably it’s the series of lower-lows and lower-highs that have built and have not yet been nullified in the USD.

U.S. Dollar Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

While the US Dollar has made a run towards those prior lows, USD/JPY has retained a more bullish structure and so far today we’ve seen defense of the 145.92 level. I think this pair still has considerable macro overtones with the USD and if we are going to see a broader breakdown in the Dollar, there will likely need to be a larger move of weakness in USD/JPY, perhaps even to the degree that we see larger-scale carry unwind take over and with that there could be reverberations in several other markets, like stocks, such as we saw last July.

That being said, price is the most important variable and so far we’ve seen defense of support at the same level that held two weeks ago at 145.92.

In the video, I went over a couple of other markets that I think could be more amenable for themes of JPY-weakness, such as EUR/JPY and GBP/JPY.

USD/JPY Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

I wrote about EUR/USD and shared three resistance levels above what was current price at the time. The first of those levels has come into play and this opens the door for a deeper run, towards the 1.1810 or 1.1830 levels that remain overhead. Notably, there was a strong reaction to the ECB rate decision earlier this morning and that has so far produced a higher-low (which matches the lower-highs in DXY looked at above). The bigger question, however, is whether bulls can continue to stretch the move as we near re-tests of the same resistance that stalled buyers just a few weeks ago.

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist