The dollar-driven forex market is kicking off the week of May 12, 2025 on edge as traders digest persistent inflation and political uncertainty in the U.S. The Federal Reserve’s fight against stubborn price pressures is colliding with election-year jitters in Washington, creating a volatile backdrop for major currency pairs. Speculation is swirling around the Fed’s next move – whether it will maintain high rates to tame inflation or begin easing amid signs of a slowing economy. Meanwhile, U.S. political cross-currents (from an unpredictable trade policy to looming election-cycle debates) are muddying the outlook and keeping safe-haven demand in play. In this environment, EUR/USD, GBP/USD, and USD/JPY are all at critical junctures, shaped by both technical levels on the charts and a slew of key economic data releases from the U.S., Eurozone, and U.K. (including CPI, retail sales, jobless claims, and GDP). Below we break down each pair and a trading strategy for the days ahead, followed by a forward-looking market outlook.
EUR/USD
EUR/USD has been whipsawing, failing to break above key resistance around $1.133 and slipping back into the mid-$1.12s. The 5-minute chart above shows last week’s attempt to rally, peaking near $1.13 on May 9 before bearish pressure returned.
Technical Strategy
Euro/Dollar ended last week on a weak note, underscoring the battle between opposing forces: a cautious Fed and a dovish ECB. Early in the week, the euro got a brief boost from upbeat Eurozone data – for instance, German industrial production surged 3.0% in April (vs. 0.9% expected), and Germany’s trade surplus surprised higher – signaling some resilience in Europe’s economy. However, euro gains quickly met a wall near $1.1330, a level coinciding with the 50-day moving average and a key technical resistance that has capped recent rallies. The pair’s failure to clear this barrier was exacerbated by U.S. dollar strength returning late in the week.
On the U.S. side, data continue to paint a mixed picture but generally support the dollar. Weekly jobless claims dipped to 228,000, slightly better than expected, underscoring a still-resilient labor market. At the same time, unit labor costs jumped 5.7% in Q1, and consumer inflation expectations have surged (the University of Michigan 1-year ahead inflation gauge hit 6.5% in May, the highest in over a decade) – all of which complicate the Fed’s inflation fight. Notably, Fed officials are in a policy tightrope: the Fed held rates steady at ~4.5% at its May meeting, citing inflation still above target and “increased uncertainty” due to President Trump’s volatile trade policy. This political uncertainty – unusual in a post-election year – is adding a risk premium, as markets weigh whether the Fed can afford to ease up on tightening with an unpredictable fiscal and trade backdrop. The result is that U.S. yields remain elevated, offering the dollar support on dips.
Meanwhile in Europe, inflation is near the ECB’s 2% goal – April CPI came in at 2.2% year-on-year, with core inflation at 2.7%. Normally, cooling price growth would open the door for European Central Bank rate cuts to prop up growth. In fact, traders are betting roughly 85% odds that the ECB will cut rates at its June meeting despite sticky core prices. The Eurozone economy is sluggish (Q1 GDP was flat to slightly positive) and faces external headwinds from trade tensions. The U.S. administration’s renewed trade tariffs are a double-edged sword for the euro: on one hand, they’ve weakened global growth prospects and could push the ECB to ease policy (weighing on EUR); on the other, if U.S. inflation stays high due to tariffs, the Fed may have to stay hawkish (also supporting USD). This policy divergence – Fed on hold vs. ECB tilting dovish – helped yank EUR/USD back down after its brief rally. The pair closed around $1.1245 on Friday, well off its weekly high.
From a technical perspective, EUR/USD’s bias tilts slightly bearish below the $1.1300–1.1330 resistance zone. Momentum indicators on daily charts show fading bullish traction, and recent candlesticks near $1.1300 (spinning tops and dojis) indicate indecision. Key support levels to watch on the downside include $1.1270 (recent lows), $1.1225, and the $1.1180 area. A break below those could open the door to a deeper pullback toward $1.1100. On the upside, any break above $1.1330 would be significant – that’s the 50-day EMA and last week’s high; above it, the next targets would be $1.1375 and $1.1425. Given the macro backdrop, euro strength may be limited unless U.S. data severely disappoint this week (for example, a soft U.S. CPI could weaken the dollar).
Trading Strategy
We maintain a neutral-to-bearish bias on EUR/USD unless it can decisively clear $1.1330. Sell rallies toward $1.1300–1.1330 with a stop above $1.1350, targeting a retracement to $1.1250 and $1.1200. More aggressive traders could aim for $1.1180 if downside momentum builds. Alternatively, if euro-dollar climbs above $1.1330 on a dovish Fed surprise, flip to bullish, as a breakout could run toward $1.1400+. In that case, buying dips above $1.1330 with a tight stop back below $1.1300 would be the strategy.
GBP/USD
GBP/USD whipsawed in early May – the 5-minute chart above (spanning May 2 and May 5) shows sterling spiking above $1.3330 on upbeat UK news before a sharp drop toward $1.3260. A brief rebound faded, reflecting the pound’s struggle amid shifting rate expectations.
Technical Outlook
Sterling starts the week under pressure, having pulled back from recent highs as monetary policy in the UK shifts course. Last week, the Bank of England delivered a surprise 25 bp rate cut, lowering Bank Rate to 4.25%. This marked the BoE’s first step toward easing in the face of rapidly improving inflation figures – U.K. CPI fell to 2.6% in March, down from 2.8% in February, putting price growth almost in line with the 2% target. Additionally, the BoE noted that the labor market has loosened and wage growth is expected to slow, removing some pressure to keep rates high. The policy pivot in London contrasts with the Fed’s stance of holding rates at multi-decade highs, and it helped flip the yield differential against the pound, pushing GBP/USD lower.
The pound’s drop was evident after failing to sustain moves above $1.3300. Technically, $1.3350 has emerged as a near-term ceiling – on May 5, GBP/USD briefly spiked on optimism (strong UK data and a Fed pause) but sellers stepped in around that level. For context, U.K. economic data had been surprisingly upbeat in Q1: retail sales volumes rose 1.6% quarter-over-quarter (the best in 4 years), including a 0.4% jump in March alone thanks to an early spring boost. This strength contributed to expectations that Q1 GDP (due May 15) will show modest growth (~0.1%), a welcome change from stagnation. Indeed, Britain’s consumer sector gave GDP a small lift of +0.08 percentage points in Q1.
However, storm clouds are gathering over the UK economy. Consumer confidence has plummeted to its lowest since late 2023 as households face rising energy bills and global financial market volatility. There’s also an external drag: uncertainty around U.S. trade tariffs is starting to bite – UK businesses worry that Trump’s import tariffs could disrupt supply chains and demand. BoE Governor Andrew Bailey even warned about an “expected shock to growth” from the U.S. trade war. In summary, the UK outlook is turning more cautious, justifying the BoE’s dovish tilt. For forex traders, this means the pound’s earlier tailwinds are fading, and focus shifts to whether the Fed’s hawkishness will outpace any resilience in the UK economy.
On the U.S. side of this pair, robust data continue to bolster the dollar. The U.S. consumer is still spending – retail sales surged 1.4% in March (the biggest rise in over two years) as Americans rushed to buy cars and other goods ahead of tariff-induced price hikes. While that burst of spending likely won’t last (it “will probably fizzle in the months ahead” as one economist noted), it kept the U.S. economy afloat in Q1. In fact, those tariff-driven purchases barely prevented a recession: advance estimates show U.S. Q1 GDP contracted at a -0.3% annualized rate, a stark drop from +2.4% in Q4, as higher imports (and cooling government spending) dragged growth down. This mix of strong consumption but weak overall growth is the kind of paradox that leaves GBP/USD torn – normally a risk-off U.S. slowdown might hurt the dollar, but in this case persistent U.S. inflation (core PCE price index jumped to 3.5% in Q1) and safe-haven flows have kept USD demand intact.
Technically, GBP/USD is mid-range and looking for direction after last week’s volatility. Immediate support lies around $1.3250–1.3260 (where buyers emerged after the post-BoE selloff). A drop below $1.3250 could see the pair test $1.3200 and the late-April lows near $1.3150. On the upside, resistance is seen at $1.3330 (recent swing high), with a tougher barrier at $1.3400. The pound would likely need a fresh catalyst to break higher – for example, a surprisingly strong UK GDP report or softer U.S. inflation reading might inspire another test of $1.335+. Conversely, if upcoming UK data disappoint or U.S. numbers beat expectations, GBP/USD could extend its pullback. The Relative Strength Index on the daily chart has turned down from near overbought territory, and the pair is back below its 20-day moving average, hinting at a loss of bullish momentum.
Trading Strategy
Given the BoE’s dovish shift, our bias on GBP/USD is cautious/bearish in the near term. Sell on upticks toward $1.3330, with a stop above $1.3370, targeting a move down to $1.3250 and $1.3180. A break under $1.3250 could accelerate losses toward $1.3100. On the flip side, if the pound rallies on positive news (e.g. a robust GDP or inflation uptick that lessens chances of further BoE cuts), bulls could look for a break above $1.3350 to go long, aiming for $1.3450 – but such a scenario likely also requires a benign U.S. backdrop. Until then, the path of least resistance may be sideways-to-lower for Cable, with any bounces viewed as selling opportunities.
USD/JPY
USD/JPY has been choppy as well – the chart above (5-minute intervals on May 5) shows the pair oscillating in a ¥143.6–144.8 range. The dollar’s intraday gains were repeatedly capped, and the session ended near ¥143.8, reflecting a tug-of-war between U.S. rate support and yen safe-haven demand.
Technical Outlook
The dollar-yen pair enters the week trading around the mid-¥143s, with conflicting forces keeping it range-bound. On one hand, the yield differential remains decisively in the dollar’s favor – the Fed’s policy rate (over 4%) towers above the Bank of Japan’s, which is still at 0.50%. This normally encourages capital to flow into dollar assets and lifts USD/JPY, as investors can earn much higher interest holding dollars than yen. Indeed, every time USD/JPY dips, it finds buyers on that fundamental support. However, on the other hand, elevated global uncertainty and periodic risk-off sentiment have underpinned the Japanese yen’s safe-haven appeal. When traders get nervous about U.S. politics, trade wars, or a wobbling U.S. stock market, the yen tends to catch a bid, tempering USD/JPY’s upside. This dynamic was evident last week: despite U.S. 10-year Treasury yields holding near 4.0%, the pair failed to sustain moves above ¥144.5 as bouts of risk aversion (and possibly some end-of-week profit-taking) led to yen strengthening.
Looking at Japan’s domestic picture, inflation in Japan has finally perked up after decades of stagnation – in fact, core CPI has exceeded the BoJ’s 2% target for 36 consecutive months as of March. The latest reading showed core inflation at 3.2% y/y, indicating that price pressures in Japan are not negligible anymore. Despite this, the Bank of Japan remains extremely cautious about tightening policy. BOJ Governor Kazuo Ueda and his board kept rates and yield curve control settings unchanged at their late-April meeting, even as they trimmed their growth outlook in light of external headwinds. A major reason is the international context – notably the U.S.–China trade war initiated by President Trump, which is clouding Japan’s export outlook and overall recovery. Officials in Tokyo fear that higher U.S. tariffs and resultant global slowdown could derail Japan’s fragile growth, so they are willing to tolerate above-target inflation for now. In Ueda’s words, cost-push inflation (e.g. surging food and energy prices) is expected to fade, and the BOJ is in no rush to hike rates until it’s confident about sustainable growth. Some analysts now predict the BOJ’s next hike (which had been on the table) may be delayed beyond mid-year.
This backdrop leaves USD/JPY largely at the mercy of U.S. developments and broad risk sentiment. U.S. inflation and Fed policy expectations are paramount: If this week’s U.S. CPI (due Tuesday) or PPI numbers show inflation remains uncomfortably high, speculation could grow that the Fed might even consider another rate hike – which would likely propel USD/JPY higher, given widening rate gaps. Conversely, any signs that the Fed could cut rates sooner (for instance, sharply weaker U.S. retail sales or a spike in unemployment claims) may cause U.S. yields to fall and the dollar to slip against the yen. Notably, Japan will release Q1 GDP figures on Friday; a stronger-than-expected growth print could strengthen the yen somewhat, but unless it alters BoJ policy expectations, its impact may be limited. Traders are also monitoring any verbal intervention from Japanese officials since USD/JPY is at levels (mid-140s) that in past years have drawn concern about yen weakness – so far, no explicit threats, but the risk is there if yen were to slide quickly toward ¥150.
Technically, USD/JPY has been trading in a roughly ¥142–¥145 range recently. Short-term support lies around ¥142.5 and then ¥141.8 (last month’s lows). Resistance is evident at ¥144.5 and ¥145.0 – a zone where sellers have defended repeatedly. A clear break above ¥145 could open the door to re-test the cycle high near ¥147, but that likely requires a fresh catalyst (such as significantly higher U.S. yields or surprise BoJ easing moves). On the downside, a break below ¥141.5 would start to look like a trend reversal in favor of the yen, possibly targeting ¥140 or below. For now, momentum indicators are lackluster; the pair’s moving averages are flattening, reflecting the consolidation. One noteworthy point: volatility can spike quickly for yen pairs if risk sentiment shifts – for instance, any escalation in geopolitical tensions or U.S. political gridlock (debt ceiling fights, etc.) could send USD/JPY lower on safe-haven flows despite fundamentals.
Trading Strategy
We prefer a range-trading approach on USD/JPY until a breakout occurs. Fade extremes of the recent range: consider selling near ¥144.5–145.0 resistance, with a stop above ¥145.5, and look for a retreat to ¥143.0 and ¥142.0. Conversely, buy dips around ¥142.0, with a stop below ¥141.0, targeting a rebound to ¥144.0. Given the dollar’s yield advantage, the pair may be biased to drift upward, so ensure stops on short positions are tight. A confirmed close above ¥145 would flip the outlook bullish – in that case, one could ride the upside momentum (perhaps aiming for ¥147), as the yen would likely weaken further if the market perceives the Fed staying hawkish while the BoJ stays dovish. However, any long trades should be mindful of headline risk: keep an eye on news out of Washington and global equities, as sudden risk-off moves can send USD/JPY tumbling unexpectedly despite interest rate differentials.
Market Outlook
Looking ahead, forex traders face a packed economic calendar in the coming days that could set the tone for the dollar and its peers. In the U.S., all eyes are on April inflation data – the Consumer Price Index report on Tuesday is the marquee event. The Fed will be dissecting the CPI for any sign that price pressures are either easing meaningfully or re-accelerating. Given the Fed’s current predicament (inflation above 3% and not falling fast enough toward 2%), a hotter-than-expected CPI could revive talk of another rate hike, boosting the dollar broadly. Conversely, a cooler reading would bolster the case that the Fed can hold or even start cutting later in the year, which might dent the dollar, especially against currencies where central banks are still hawkish.
Mid-week, U.S. retail sales (Thu) will be crucial to gauge the health of the consumer after March’s tariff-driven surge. Forecasts suggest a more modest change in April – any major surprise could swing USD sentiment. Also on Thursday, the U.S. will release weekly jobless claims (watching if the recent low 200Ks trend persists or if layoffs are creeping up) and regional manufacturing indices (Empire State and Philly Fed) that will hint at economic momentum in Q2. So far, the U.S. economy shows a dichotomy – resilient spending versus faltering production – and the data this week will be pivotal in shaping Fed expectations for the June FOMC meeting. It’s worth noting that Fed officials will also be speaking (FOMC Governor Waller and others are on the docket), and any hint of policy leanings (especially in an election-sensitive environment) could jolt markets. The Fed knows it is operating under a microscope politically: with a presidential administration keen on strong growth ahead of elections and lawmakers fretting about high prices, the pressure is high to get policy “just right.”
Internationally, Eurozone and UK data will also drive forex moves. The Eurozone’s final April CPI reading and industrial output figures are due – these should confirm the bloc’s inflation at ~2.2% and whether growth is slowing markedly. Any downside surprises in Eurozone activity could increase bets on ECB rate cuts, weighing on the euro. In the U.K., the highlight is UK GDP (Q1 preliminary) on Thursday. The market is bracing for a very small positive number (or even flat growth). A stronger result (say +0.2% or more) might give sterling a lift and ease some recession fears, whereas a negative surprise could amplify concerns that the BoE moved to cutting rates just as growth is faltering.
Politically, markets remain alert to Washington’s wrangling and global trade tensions. The U.S. government’s approach to trade (tariffs on strategic partners and rivals) is under the spotlight – already it has had tangible effects like Americans panic-buying to beat price hikes. As the U.S. enters what is traditionally an election campaign season, any further shifts in trade or fiscal policy (for example, talk of tax cuts, infrastructure spending, or conversely, debt ceiling standoffs and spending cuts) could inject volatility into the dollar. Election-year uncertainty, even in 2025, is on traders’ minds – President Trump’s administration has shown that policy can change on a tweet, and with Congress gearing up for mid-term positioning, unexpected headlines are a risk factor. This uncertainty tends to cap excessive risk-taking, which is partly why safe-haven currencies like the yen and Swiss franc have been well-supported on dips.