On Monday the U.S. dollar staged a powerful rally, fueled by news of a 90-day tariff reprieve in the U.S.-China trade war. The Greenback soared 2.1% against the yen to a one-month high around ¥148.60, and its strength left rival currencies reeling – EUR/USD slid ~1.5% to dive below $1.1100, while GBP/USD briefly plunged under $1.3200. Markets cheered the tariff rollback as a sign that the worst of the trade war might be over, easing fears of supply chain disruption and inflation. This dollar boost was compounded by the Fed’s recent decision to hold interest rates unchanged, which kept U.S. yields relatively attractive. By Tuesday, however, the dollar’s rally paused as focus shifted to inflation data. U.S. CPI for April came in at +2.4% YoY (core +2.8%) – right on expectations, and unchanged from March, suggesting price pressures remain contained. With inflation steady, traders scaled back hawkish bets, causing the dollar to give back some gains and allowing the euro and pound to rebound from their lows. Risk sentiment improved on the margin, though investors remain wary of political risks on the horizon. In Washington, the spotlight turns to debt ceiling drama – the Treasury has warned it could run out of cash by August if Congress doesn’t act, and that a failure to raise the debt limit would “wreak havoc” on the financial system. This brewing showdown, along with other U.S. political maneuvers, is casting a shadow over market confidence even as trade tensions temporarily ease. Below we break down the technical outlook and trading strategies for EUR/USD, GBP/USD, and USD/JPY in this volatile backdrop:
EUR/USD
Technicals in Focus
The euro-dollar pair saw a dramatic plunge to start the week, then an equally striking rebound. Early Monday, EUR/USD tumbled from the $1.12s to a trough around $1.1080 as the surging dollar bulldozed the euro. This drop marked a one-month low, slicing through several support levels. However, the pair found buying interest near $1.1080 (a region that roughly coincides with late-April lows) and swiftly bounced back. By Tuesday, euro bulls had erased a good portion of the losses – EUR/USD climbed back above $1.1150 and is now consolidating near the $1.1180 area. The sharp V-shaped recovery suggests strong demand kicked in at the lower levels. Short-term momentum has flipped upward: on the 5-minute chart, a series of higher lows formed through Tuesday, and the pair is back above its 50-period moving average (intra-day). Still, overhead resistance looms around $1.1200–1.1230, which was the breakdown zone on Monday. A push above $1.1230 (this week’s high before the fall) would indicate the euro’s recovery has legs, opening the door toward $1.1300. On the downside, immediate support lies at $1.1150, with stronger support at $1.1080 (the recent low). Euro sentiment is cautiously bullish in the short run, but traders are on guard for any news that could disrupt its rebound.
Trading Strategy
Moderately bullish – the euro’s rebound momentum may extend if risk sentiment holds. Consider a buy-on-dips approach above the $1.1150 support. For instance, long positions around the $1.1160 level can target a retest of $1.1250, with an eye on $1.1300 if bullish forces strengthen. A stop-loss below $1.1100 (just under Monday’s panic low) protects against a false breakout or renewed dollar strength. This setup bets on EUR/USD revisiting its early-week highs now that panic selling has subsided. Alternate scenario: If EUR/USD fails to clear the $1.1200 hurdle convincingly, it could slip back into a consolidation or retest $1.1100 – in that case, tightening stops or taking partial profits on longs would be prudent. Given the still-unsettled backdrop, maintain discipline: any hawkish Fed surprises or resurgence in dollar demand (perhaps from haven flows on negative news) could cap the euro’s advance.
GBP/USD
Technicals in Focus
The British pound traced a similar trajectory to the euro – a steep selloff followed by a robust recovery. In the wake of the dollar’s Monday surge, GBP/USD collapsed from the mid-$1.33 zone to a low near $1.3150. This plunge wiped out over a week’s worth of gains in mere hours. Notably, $1.3150 held as a support floor – the pair bounced twice off that level during Monday’s worst volatility, suggesting it as a short-term base. Through Monday afternoon and into Tuesday, sterling ground its way higher, forming an upward channel on intra-day charts. By Tuesday’s end, GBP/USD had climbed back to the $1.3290 area, only a stone’s throw from where it started before the drop. The rapid comeback indicates that pound bulls remain active, although the pair has yet to reclaim the $1.3340 peak from early Monday. That zone around $1.3300–1.3340 now acts as immediate resistance – it includes a round-number threshold and the prior swing high. A break above $1.3340 would signal a bullish breakout, potentially targeting the $1.3400 region next. On the flip side, support levels to watch have stepped up: minor support is seen at $1.3240 (Tuesday’s pullback low), with stronger support at $1.3150 (Monday’s double-bottom low). Technical indicators point to recovering momentum, but the pound’s strength might be tested by its own fundamentals – notably, the latest UK jobs data showed a tick up in unemployment to 4.5% and slower wage growth at 5.2% (vs 5.6% forecast). These softer UK figures could temper GBP’s rise compared to the euro. For now, though, price action is bullish short-term, aligned with the broad dollar pullback.
Trading Strategy
Cautiously bullish – sterling has regained poise, but we prefer waiting for either a clear breakout or a dip to support before committing. One strategy is to buy on a breakout: go long if GBP/USD closes above $1.3340 (the week’s high), confirming upside momentum. In that case, aim for a move to $1.3420 (near the next resistance and an interim March high), with a stop-loss around $1.3280 to guard against a fake breakout. Alternatively, if the pound sees a slight pullback first, a buy limit near $1.3220–1.3240 (trendline support zone) could be attractive, with targets back at $1.3330 and $1.3400, and a stop below $1.3150. Given the mixed UK fundamentals, we employ caution – keep position sizes reasonable. If risk sentiment sours or any negative UK headlines emerge, GBP/USD could quickly drift back toward $1.3200 or lower. Thus, traders should monitor both U.S. news and UK developments (e.g. any Brexit-related or economic updates). For now, the path of least resistance is mildly upward, in line with the pound’s post-plunge recovery, but sterling may remain a laggard if the dollar weakens broadly (since the euro and riskier assets might outperform on improved sentiment).
USD/JPY
Technicals in Focus
USD/JPY, 5-minute candlesticks. The USD/JPY pair has been center stage amid the dollar’s wild swings. On Monday, dollar bulls ran rampant against the yen, driving USD/JPY up from the mid-¥145s to a peak of about ¥148.60 – the highest level in over a month and nearing last year’s highs. This vertical surge reflected both broad USD strength and a classic risk-on move (as traders sold safe-haven yen when trade tensions eased). However, by Tuesday the tide had turned: after peaking, USD/JPY pulled back sharply, dropping into the ¥147.50s. The pair’s inability to hold above ¥148+ indicates that the rally met heavy resistance, and profit-taking kicked in once immediate drivers faded. Short-term, the chart shows a rounding top formation – successive lower highs from ¥148.6 down to ~¥148.2, before the slide to ¥147.5. The pair is now hovering around ¥147.6, off its highs and testing support. Immediate support lies at ¥147.50 (Tuesday’s low area); a decisive break below that could open the way to ¥146.80–¥147.00 (where the pair consolidated before Monday’s spike). Below ¥146.8, the next support is around ¥146.0 (a psychological level and last week’s support zone). On the upside, resistance is firm at ¥148.5–¥148.6 (the recent high). The 5-minute chart shows momentum indicators rolling over from overbought territory, suggesting the pair may be due for a breather after the outsized jump. Additionally, with U.S. inflation data calming Fed rate expectations, U.S. Treasury yields eased slightly – taking some wind out of USD/JPY. It’s worth noting the fundamental backdrop: the Bank of Japan’s ultra-dovish stance remains unchanged, which had been a factor in yen weakness, but U.S. political uncertainty (debt ceiling risk, etc.) could revive safe-haven yen demand. In summary, USD/JPY’s technical tone has shifted from strongly bullish to neutral/slightly bearish near-term as it comes off its highs.
Trading Strategy
Bearish USD/JPY (bullish on yen) in the short term – we anticipate further corrective downside after the dollar’s spurt. A potential setup is to sell rallies: consider a short position if USD/JPY bounces toward the ¥148.00 level. The idea is to fade any retracement into resistance, with a target back down at ¥147.00, and an extended goal of ¥146.50 if volatility continues. A tight stop-loss above ¥148.60 (just beyond Monday’s peak) would cap risk in case the dollar uptrend resumes. This risk/reward favors a pullback, given that USD/JPY struggled to sustain highs. Alternatively, aggressive traders could even short at current levels (~¥147.6) with similar targets, but ideally after a minor uptick to improve entry. Fundamental rationale: With the Fed on hold and U.S. CPI not accelerating, there’s less impetus for U.S. yields to push higher near-term – that removes a key support for USD/JPY. At the same time, political jitters (like U.S. default fears or any geopolitical flare-ups) could bolster the yen. One wildcard is the BoJ: any hint of policy shift could amplify yen strength, though none seems imminent. As always, watch risk sentiment closely – if global stocks roar higher and the dollar regains broad strength, USD/JPY could re-test 149 rather than pull back. For now, however, the pair appears to be backing off from its euphoric highs, making a tactical short play appealing.
Market Outlook
Looking ahead, traders should brace for more headline-driven moves. On the economic front, attention will turn to U.S. Retail Sales and Industrial Production data due later in the week, which will offer clues on the health of the U.S. consumer and industry. Europe will see inflation updates from several countries and the Eurozone trade balance (which last showed a smaller surplus of €17.5B in March, down from €24.0B). In the UK, inflation and retail figures are on the radar after the soft employment report. These releases could all inject volatility into EUR/USD and GBP/USD respectively. However, the biggest wildcards remain political. In the U.S., the clock is ticking on the debt ceiling – investors are increasingly anxious as we inch toward mid-summer without a deal. Treasury Secretary Bessent’s warning that extraordinary measures could run out by August without congressional action underscores the stakes; any hint of progress (or stalemate) in negotiations may whipsaw the dollar and risk assets. U.S. political posturing – from budget battles to international trade relations – will thus be a key theme. The recent U.S.-UK trade agreement (a limited deal that modestly lowers some tariffs) and the U.S.-China tariff truce show Washington’s trade agenda can shift market mood in an instant. Traders will be on alert for whether the 90-day U.S.-China tariff pause leads to a more lasting accord or if tensions reignite. Meanwhile, any surprise commentary from Fed officials (especially regarding how political uncertainty factors into the economic outlook) could add fuel to the fire.