EUR/USD Rallies to Monthly High as US CPI to Drive FX Trends

EUR/USD Talking Points:

• EUR/USD finished the week with a big test of resistance at prior support, extending the breakout from the prior week but with an abundance of questions over drivers as it still appears that the main FX flows are coming from the USD/JPY setup.
• For next week, there’s a lot importance around the US CPI report as shows of slower inflation can impact US rate hike odds which can then further impact that USD/JPY carry trade. And if we do see more long-term longs closing then USD-weakness can drive in several other markets, EUR/USD included.

It’s rare that the Euro isn’t the major driver of the Dollar basket, because after all, it is a whopping 57.6% component of DXY. But the reality is sentiment matters, as does positioning, and if we’re seeing that massive carry trade in USD/JPY unwind with USD selling and JPY gaining, well even the larger major pair of EUR/USD can be impacted.

We saw this happen back in July of 2024, when nothing especially great was happening for the Eurozone economy yet EUR/USD gained almost 500 pips in Q3. But remember, these are FX pairs that we’re talking about so there’s two components, and even if the Euro is hovering or treading water, the act of the US Dollar dropping can lift the net value for the pair which is what happened.

Back then it was a BoJ intervention on the morning of a US CPI print creating a perfect storm. To that point there was doubt as to whether the Fed would actually be able to cut rates. That CPI print cemented expectations that they would be able to, and with an assist from the Bank of Japan intervening, suddenly, long positions in USD/JPY had reason to bail. And that USD-weakness had a significant impact on FX markets across-the-board, EUR/USD included. We saw a small snippet of that two weeks ago when a coordinated intervention pushed USD/JPY down by almost 900 pips, helping to prod a breakout in EUR/USD as the pair pushed out of a falling wedge formation and continued to rally through last week until finally finding resistance at a familiar area of 1.1576.

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD Shorter-Term

At this point there’s a short-term pattern of higher-highs and lows that trend traders can work with, especially the focal point around the 1.1500 handle that I had looked at in last week’s webinar. That zone can be extended up to the higher-low of 1.1515 to create an area to look for bullish defense on pullback scenarios. A bit closer to current price as we wind towards the weekly close is a prior point of resistance at 1.1560, and below 1.1500 there’s a spot of prior resistance from 1.1455-1.1469 that remains relevant.

If bulls fail to hold prices above that last zone, it’s going to begin to look as though the breakout and fresh rally has failed.

EUR/USD Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro