CPI Reaction in USD: USD/JPY 145 Failure, EUR/USD 1.1500 Test

This morning's CPI data printed below expectations, with YoY headline CPI at 2.4% (vs. 2.5% expected) and Core CPI at 2.8% (vs. 2.9% expected), initially weakening the USD. While EUR/USD is approaching a 1.1500 test, USD/JPY failed to break out above 145.00, suggesting USD bulls may not be entirely out of the picture despite increased rate cut expectations; the author suggests GBP/USD and USD/CAD may present more compelling opportunities for USD-weakness strategies.

Analysis

The latest Consumer Price Index (CPI) report revealed softer-than-anticipated inflation, with year-over-year headline CPI at 2.4% against an expected 2.5%, and core CPI at 2.8% versus a 2.9% forecast. This data initially pressured the U.S. Dollar downwards; however, sellers have exhibited subsequent trepidation, failing to breach last week's lows, which suggests a potential "bearish stall" and the initial phase of a possible bullish reversal if bearish pressure continues to slow. Key USD support levels are near the April low of 97.97 and last week's higher-low, which bears must overcome to confirm renewed downward momentum. In major currency pairs, EUR/USD, which constitutes 57.6% of the DXY, is nearing a test of the 1.1500 resistance, where a decisive break above would be bullish, though it formed a lower-high last week. Conversely, USD/JPY has shown resilience, failing a breakout attempt above 145.00 and retracting despite the disinflationary CPI data that typically increases rate cut expectations, indicating that underlying USD bullish sentiment has not entirely dissipated, particularly if it can sustain a trend above this handle. The prevailing market sentiment is characterized as "mixed" with a "speculative" tone, reflecting this current indecision in USD price action following the inflation data.

Key Decisions for Investors

• Investors should monitor the U.S. Dollar for a break below its April low (97.97) and last week's higher-low to confirm renewed bearish momentum, or alternatively, watch for signs of further consolidation indicative of a bearish stall.
• For EUR/USD, closely observe price action around the 1.1500 level; a sustained break above could signal further upside potential, whereas repeated failure at this resistance might indicate buyer exhaustion and a possible turn lower.
• Traders should assess USD/JPY for a potential sustained move above the 145.00 handle, as this could signify underlying USD strength despite recent disinflationary CPI data and challenge the prevailing USD bearish narrative.
• Consider evaluating GBP/USD and USD/CAD for potentially more distinct trading setups aligned with USD-weakness scenarios, as suggested by the analyst.
• Acknowledge the current speculative market tone and mixed sentiment surrounding the USD, warranting caution and potentially smaller position sizes until a clearer directional trend emerges post-CPI.