USD regains bullish stride, EUR/USD and USD/JPY look set to converge

The US dollar regained its bullish stride on Wednesday, snapping the 3-day bearish streak which dared to defy its strong trend. Odds of Fed cuts next year continued to diminish, to the point that even a 25bp cut in December hangs in the balance. Fed fund futures now imply just a 52% chance of further easing in December, down from around 82% one week ago.

In line with my own views, a Reuters poll revealed 57 out of 67 economists say the risk of a resurgence of US inflation next year has risen, with the vast majority also saying Trump’s tariffs will significantly impact the US economy. But data this week already points to inflation heating up elsewhere.

Like we saw for Canada on Tuesday, inflation data for the UK came in hotter than expected on Wednesday. This points to a slower pace of cuts for the BOE, and adds further to concerns that we’re going to see a widespread uptick for inflation globally as we head into next year. This could also make flash PMI reports on Friday more relevant if they continue to perk up.

Speaking of inflationary, Trump has picked Howard Lutnick of financial services firm Cantor Fitzgerald to be head up the Commerce Department. As commerce secretary, Lutnick will likely be instrumental in how the US deals with China’s tech sector. And with Trump touting tariffs of up to 60% for during his campaign, we’re all set for another tit-for-tat trade war between the two superpowers. The announcement of Lutnick saw his odds of becoming the US Treasury Secretary drop to below 1%, with investor Mark Rowan now in pole position to take the job with a 51% probability according to Polymarket.

USD index technical analysis

With just over half the week down, the USD index has nearly recouped all of its earlier losses. But if it were to close the week around current levels, it would leave a small bearish inside day called a hanging man reversal. While not particularly bearish in isolation, it shows a hesitancy to continue higher. Although we saw a similar candle emerge ahead of the election which clearly did little to reverse its trend lower. And should we see a repeat of the mid-July to early October rally, we could be looking at the 108 handle in just a few weeks.

The daily chart shows a 3-bar bullish reversal (morning star formation) and swing low around the weekly pivot point. A break above could 107 assume bullish continuation and brings the weekly R1 ~107.5 into focus, alongside the 108 handle. But note the bearish divergence on daily RSI, so I am on guard for an initial false break higher and choppy trade to persist. If prices do somehow retrace lower, there are some decent support levels between 105.35 (election high) and 105.63 (April high) to keep the retracement shallow.

EUR/USD, USD/JPY technical analysis:

With Europe caught between the Russia-Ukraine conflict and potential Trump tariffs, a break below 1.05 could be on the cards. And the euro, accounting for ~57% of the USD index, such a move could send it above 107. The 2023 low around 1.0450 then comes into focus for bears.

However, yen’s weighing in the USD index is much lower at ~14%, so a break higher on USDX may not equate to a bullish breakout for USD/JPY above 156.79. Besides, Japan’s Ministry of Finance (MOF) jawboned the yen on Friday to send USD/JPY nearly 300 pips from its daily high, and as traders have memories, I suspect they may do the MOF’s work for them and book profits before a breakout occurs. This should cap gains beneath the week’s high, while further jawboning or bouts of risk-off (that could benefit the yen) could trigger a deeper pullback on USD/JPY.

Events in focus (AEDT):

With traders already set for a return of inflation next year, they’ll likely be extra sensitive to pockets of economic strength. So it may not take much of a beat for US jobless claims or manufacturing data today to extend the USD rally.

• 10:50 – Foreigner bond, stock purchases
• 19:00 – RBA governor Bullock speaks (unlikely to be on monetary policy)
• 00:30 – US jobless claims, Philly Fed manufacturing
• 01:00 – BOE MPC member Mann speaks
• 02:00 – EU consumer confidence
• 02:30 – ECB Elderson, Lane speaks
• 04:25 – Fed Goolsbee speaks

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge