Resilient Dollar How Inflation and Trade Policy Shape the Forex Landscape

In recent weeks, the dollar has been bullish, even against slightly softened inflation data. Despite a mild decrease in the U.S. Consumer Price Index (CPI), the dollar’s downturn was brief, indicating solid underlying support from institutional investors. This response highlights how, despite softer economic data, the dollar remains buoyed by strong institutional backing and heightened anticipation around U.S. trade policy changes, both of which have bolstered investor confidence in the dollar’s continued strength.

USA CPI  Source: Finlogix Economic Calendar The initial reaction to the CPI print was a modest drop in U.S. yields, suggesting an expectation for controlled inflation. This move was soon offset, however, by a strong dollar rebound as demand surged from real-money investors, particularly during the New York session. Many of these investors had been absent earlier but provided significant support upon re-entry. Their renewed presence underscores the underlying demand for the dollar, driven by solid economic sentiment and the potential impact of new trade policies expected to influence global markets.

US01Y Bonds 15M Chart  Source: TradingView One prominent factor in the dollar’s resilience is the market’s current emphasis on trade policy shifts over traditional economic indicators. While U.S. economic data traditionally plays a strong role in currency valuation, many investors now view forthcoming trade policy changes as having a more lasting impact on global market confidence. Speculation around restrictive trade measures has helped shore up the dollar as investors take a wait-and-see approach. This policy anticipation creates an environment less likely to see substantial dollar sell-offs, given the supportive stance of both institutional and speculative participants in the market.

In terms of positioning, I’m preferring for maintaining long-dollar positions, particularly in euro and yen pairs. EUR/USD and EUR/JPY are two areas where investors expect continued dollar gains, capitalizing on the sustained strength of the U.S. dollar. While there has been a minor reduction in short positions on the pound (GBP), the primary focus remains on the euro and yen. These currencies present attractive opportunities given the dollar’s current upward momentum, and traders seem poised to continue this trend, especially considering uncertain Eurozone growth.

EURUSD and EURJPY H4 Chart  Source: Finlogix Charts The euro, meanwhile, has remained weak, with the EUR/USD pair approaching year-to-date lows and potentially retesting the 2023 low of 1.0450. This pattern mirrors growing investor concerns over Eurozone economic stability and the potential ramifications of U.S. policy changes. A break below 1.06 in EUR/USD would be a technical signal of further downside, particularly if U.S. trade policy clarity remains elusive. This persistent weakness in the euro suggests that, in the absence of stabilizing factors, the dollar could see continued gains against the single currency.

For the British pound, the market has taken a more bearish stance, particularly due to consistent selling from large, real-money investors and a well-established support at the 1.28 mark. Although there is some pullback in short positions, bearish sentiment remains strong, with EUR/GBP support levels targeted around 0.8300/50. The pound’s struggles are accentuated by the dollar’s strength and a cautious approach among investors, who are wary of GBP’s prospects amid ongoing trade discussions.

GBPUSD Daily Prices  Source: Finlogix ChartsAlso, I’ve been observing emerging market currencies, with USD/TRY being a preferred choice. This reflects confidence in the dollar’s continued strength relative to the Turkish lira, with traders favouring this pair as they anticipate further downside pressure on emerging market currencies in relation to the dollar.

Technically, GBP/USD finds immediate support at 1.2670, and if bearish trends persist, there is potential for a test of the June lows around 1.2610. In EUR/USD, a sustained break below 1.06 would indicate a more defined downtrend. Furthermore, if prices close below the CPI high of 1.0655, it could confirm this bearish momentum, signalling further downside in the euro-dollar pair.

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