US Dollar Playbook: Technical Setups for EUR/USD, AUD/USD, USD/JPY

US Dollar Setups (EUR/USD, AUD/USD, USD/JPY)

• The US dollar appears to benefit from geopolitical uncertainty
• EUR/USD vulnerability exposed despite an uptick in sentiment data
• AUD/USD slide continues after uninspiring Chinese GDP data
• USD/JPY flirts with dangerous level ahead of Japanese CPI
• Navigate the markets with confidence – get your US Dollar Q2 trading forecast below!

USD Appears to Benefit from Geopolitical Uncertainty

In what is a rather quiet week for the dollar – as far as scheduled risk (data) is concerned – a thorough analysis of USD pairs can help establish a basis for future price action. The dollar performed extremely well in Q1, particularly against major currencies, and looks set to continue in a similar fashion at the start of the second quarter.

Better-than-expected US CPI data provided the catalyst for the recent USD advance, that now appears to be benefitting from an added safe haven boost, keeping the dollar at elevated levels. Due to the sheer robustness of US data (inflation, jobs and growth), markets have had to revise estimates of Fed rate cuts in 2024 and now envision around two 25 basis point (bps) cuts this year.

EUR/USD Vulnerability Exposed Despite a Uptick in Sentiment Data

The EU and Germany have revealed improving sentiment and confidence data in recent months, suggesting that analysts expect that we have already seen the trough in Europe. Nevertheless, hard data like inflation, employment and growth are on the decline – weighing on ECB policymakers to loosen financial conditions. The ECB’s governing council meets again in June when they will be armed with the latest economic projections when deciding whether it will be appropriate to cut interest rates for the first time since the hiking cycle got under way in 2022.

With a June cut largely expected by the market and numerous ECB officials, the euro is likely to remain weak against the high-flying dollar – weighing on EUR/USD. The pair holds just below the 28.6% Fibonacci retracement of the major 2023 decline which may be tested in the short-term considering the current oversold conditions. The recent decline represents the fastest 5-day drop since February 2023 despite the pair opting for consolidation yesterday and seeing a similar start to today’s price action.

The longer-term direction appears to favour further weakness as the US-EU interest rate differential is expected to widen. The full retracement of the major 2023 decline is the next major level of interest to the downside at 1.0450 but given the rate of decline in EUR/USD, a shorter-term period of consolidation or even a minor retracement may materialise.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

AUD/USD Slide Continues After Uninspiring Chinese GDP Data

The Aussie Dollar has not only retraced its recent advance but has continued to head lower, printing a new yearly low. The recent drop in risk sentiment, fueled by geopolitical uncertainty in the middle east and the prospect of delayed interest rate cuts in the US, is having an impact on the ‘high beta’ currency.

Chinese GDP this morning beat expectations but was not enough to convince the market that the economic outlook is improving in a material way. In addition demand data for March was feeble as retail sales and output data appeared soft.

AUD/USD dropped below 0.6460 – a level that had roughly supported prices this year despite a momentary breach in February. 0.6365 is the next level to note on the downside with the RSI not yet entering into oversold conditions which suggests there could still be more downside to come for the Aussie. A short-term pullback may test the 0.6460 level in the interim.

AUD/USD Daily Chart

Source: TradingView, prepared by Richard Snow

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USD/JPY Flirts with Dangerous Level Ahead of Japanese CPI

USD/JPY was provided with further bullish impetus after yesterday’s US retail sales came out better-then-expected which continues the bullish USD outlook. Numerous warnings from Japanese officials, including the finance minister, failed to deter the sharp moves higher in the pair – teeing up the potential for direct FX intervention to strengthen the yen.

The issue Japan is having is even with the latest rate hike out of negative territory, the carry trade incentive is still very appealing given the interest rate differential that exists between the US and Japan. Unless the Bank of Japan hike rates in a meaningful way, the carry trade is likely to continue.

USD/JPY approaches 155.00, a level identified by the former top currency official, Mr. Watanabe as a possible level where officials may intervene. If the pair is allowed to trade higher from there, the 160 mark comes into focus as the level of resistance last seen in 1990. Bullish trade setups from here are fraught with risk and provide an unappealing risk-reward ratio. Levels to the downside include 152.00 and 150.00 flat.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX