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USD bears get a reprieve, more weakness to come?
John J. Hardy
Global Head of Macro Strategy
Summary: The weak US May CPI data finally sent EURUSD above 1.1500, if in oddly delayed fashion, with USDJPY also under pressure overnight. Can fresh reminders that disruptive US trade policies remain a threat put fresh broad pressure on the greenback?
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Just as the longer term USD bears like myself were losing faith that the USD could come under pressure in the near term, we get a one-two combo to rebuild some bearish momentum for the greenback yesterday: first a very weak May US CPI data that saw both headline and core inflation coming in softer than expected, with a chunky -0.2% surprise for the month-on-month core print (+0.1% vs. +0.3% expected).
EURUSD lurched above 1.1500 overnight after some odd choppiness in the wake of the data release. I wonder if that odd behavior was on stale EURUSD longs taking profits ahead of 1.1500 yesterday just after the data release on the fear that directional momentum would fail once again.
Alas, the second kicker for the USD bears late yesterday was the acceleration lower on Trump reiterating that he would simply unilaterally issue tariff rates within two weeks if no deals are signed. USDJPY interestingly took over the lead in USD selling on this (which it should have already done on the drop in US treasury yields). Yes, markets seemed to have become immune to trade headlines, but tariffs are significant and having an impact that will grow with the higher final rates in many cases: the US budget deficit report showed tariff revenues for May at USD 23 billion, up 270% from a year ago and despite huge front-running of imports before the tariffs hit. This won’t have meaningful impact on the size of the budget deficit this year, which will likely be close to USD 2 trillion.
Where will USD weakness intensify most from here? USDJPY might take the lead once again if we get the critical combination of weak risk sentiment and lower US treasury yields. Another elevated US weekly jobless claims number today might do the trick there, but the technical setup requires some more momentum to build – a quick challenge of that sub-142.50 range support could setup the clash with the titanic 140.00 level.
A bit surprised that a July FOMC cut is not more in play here – a few weak jobless claims prints and an ugly June US jobs report and we could have a change of tune by July. Will the FOMC open the door more widely on data dependency (focus on labor market) next week?
Chart: EURUSD
Some odd price action in the wake of the soft US CPI release yesterday, but the break higher above local resistance held and 1.1500 was even taken overnight. A daily close above that level is now key and would be the first since April and only the second since 2021. A fresh bout of concerns on the US trade policy front and a solid consolidation in risk sentiment could send the price action to 1.2000 rather quickly, given that we have consolidated for 6-7 weeks since reaching the 1.1500 mark in April.
FX Board of G10 and CNH trend evolution and strength. Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board. The US dollar is the clear weakling again. Sterling is not trending, but momentum turning a bit more negative now, with today’s weak April Manufacturing Production and Index of Services numbers not helping. Enormous trade deficit numbers not doing the sterling outlook any favors, either (the April trade deficit nearly hit a record high). Elsewhere, EUR and NOK atop the leaderboard, with JPY potentially interesting so far only in the short-term positive momentum shift.
Table: NEW FX Board Trend Scoreboard for individual pairs. EURCHF trying to get interesting in the trending department with the move above 0.9400, but needs to sustain! EURGBP set to flip to a positive trend today unless it reverses back lower. Some strong new surges in EUR crosses like EURAUD and EURCAD that could be trade policy/risk sentiment related.
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