The FX Trader: USD rally faces CPI test and iron grip of long-term range

The latest

US dollar status: still in breakout mode, but also still within longer term range with low anticipated volatility. Friday’s big risk-off move in bubbly tech stocks partially reversed Monday, while Monday’s crude oil price surge on fresh hostilities in the Iran war has completely reversed. That leaves the big surge in US Treasury yields in the wake of Friday’s May jobs report, which has reversed least of all. These are the intermarket forces moving the US dollar, which remains above the key breakout levels from Friday, but now having retraced some of that move, awaiting developments (see EURUSD chart focus below). The next key developments could include another bout of determined Japanese intervention against a weaker JPY if USDJPY continues slipping higher above 160.00 in the wake of the May US CPI release tomorrow.

Let’s recall that the May 12 release of hotter than expected April US CPI numbers for both the headline and the core failed to generate much volatility, perhaps as Iran war headlines were still more dominant at the time. With prices at the pump at US gas stations receding consistently since late May and hopes for an Iran war ceasefire high on Trump’s very clear determination to declare a ceasefire deal, will the market look through slightly hot inflation data? Unsure. Softer than expected data would be the surprise-side if there is one.

Regardless, if crude oil prices are a non-factor and trading sideways to lower, the two variables to watch in a FX market that seems to be taking its signals from other markets, are the US treasury market and risk sentiment in global equities after Friday’s chunky moves. All the while, market participants may be wary of making determined directional trades ahead of the beginning of what is likely to be a profound transition at the Fed under the leadership of new Chair Kevin Warsh. Much more on that in a later update before next Wednesday’s FOMC meeting.

AUD softer on NAB call on RBA policy. The Aussie was soft in the crosses overnight, but the catalyst was not another woeful Westpac Consumer Confidence survey print for June, which saw confidence slipping back toward the April cycle low rather than improving slightly. Rather, it was National Australia Bank reversing its call for another RBA rate hike in August and saying that the next rate move would more likely be a cut, if with uncertain timing. The RBA has been hiking into supply-side inflation shock and now rising unemployment, so it seems a fair call. AUDNZD fell from Monday’s high of 1.2187 as far as 1.2084 overnight before rebounding slightly.

BoC and ECB on tap, with the ECB the one to watch Thursday. We can safely assume no move from the Bank of Canada at tomorrow’s meeting, which faces a weak Canadian economy and aggravated uncertainty from Trump tariff threats as tensions remain high ahead of the July 1 deadline for renewal of the existing USMCA deal (which is what the US side calls it, in Canada it is called CUSMA). That deadline will be missed, according to sources, which will leave the terms-of-trade landscape uncertain, potentially for months. The USDCAD rally has extended to the top of the recent range into the 1.3950 area, leaving only the 1.4100+ range highs as the next resistance should USD strength persist.

The market is pricing near total certainty that the ECB hikes this Thursday in a move that could eventually play like Trichet’s 2008 and especially the two 2011 hikes if the forward projection of another hike in September plays out. I would lean for a slightly dovish surprise potential in the guidance as the ECB would do well to hem and haw on the potential for further tightening, considering the very weak Eurozone growth and that rate tightening does nothing to address a supply-side inflation shock. Let’s see.

Chart focus: EURUSD
Many USD pairs are in the same situation as EURUSD – some having broken recent key local levels and suggesting a USD breakout, but still hemmed in by the longer-term broader range. In the EURUSD’s case, that range extends below the key round 1.1500 level that was touched to the pip yesterday and to the March low of 1.1411, which is the lowest level since 2025. This Thursday’s ECB meeting will prove far less influential in moving the EURUSD level than the direction of US treasury yields and broader risk sentiment in the wake of next Wednesday’s FOMC meeting (the US CPI release tomorrow could prove a temporary distraction and drive broader choppy USD volatility if at first the USD trades stronger and then Japan’s MoF steps in and starts slamming the market with USDJPY selling, which can leak into other USD pairs.). The upward arrow suggests that a strong and quick reversal back into the range is needed for bulls to build a case for a test higher still.