Most Read: US Breaking News - US CPI Prints Largely in Line with Estimates, USD Dips

The U.S. dollar fell sharply on Wednesday, weighed down by a significant drop in U.S. Treasury yields following the release of softer-than-anticipated April U.S. consumer price index data, which revived hopes that the disinflationary trend that began in late 2023 but stalled earlier this year has resumed.

For context, headline CPI rose 0.3% on a seasonally adjusted basis, against a forecast of 0.4%, bringing the annual rate to 3.4% from the previous 3.5%. Meanwhile, the core gauge climbed 0.3%, with the 12-month related reading easing to 3.6% from 3.8% previously, in line with estimates in both cases.

Although upside inflation risks have not dissipated, today's report suggests that the cost of living is moderating and moving back in the right direction from the central bank's vantage point. With oil prices falling sharply in recent weeks, the May data could also be benign and reassuring, giving the Fed the cover it needs to begin easing monetary policy in the fall.

In light of recent developments, the U.S. dollar may find itself in a vulnerable position in the short term, especially with traders growing increasingly confident that the Fed would deliver its first rate cut of the cycle in September. As these expectations firm up, it would not be surprising to see the greenback lose some ground against some of its major peers, such as the euro and the yen.

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FOMC MEETING PROBABILITIES

Source: CME Group

EUR/USD FORECAST - TECHNICAL ANALYSIS

EUR/USD rallied nearly 0.5% on Wednesday, clearing trendline resistance and a key Fibonacci ceiling at 1.0865. If the breakout is confirmed with a follow-through to the upside, we could soon see a move towards 1.0980. On further strength, the focus will turn to 1.1020, which corresponds to a medium-term trendline extended from last year’s high.

Conversely, if sellers mount a comeback and propel prices lower below 1.0865, the pair could start to lose momentum, setting the stage for a possible downward reversal towards 1.0810. Below this technical floor, all eyes will be on the 50-day and 200-day simple moving averages near 1.0790. If weakness persists, a pullback towards 1.0725 cannot be ruled out.

EUR/USD PRICE ACTION CHART

EUR/USD Chart Created Using TradingView

USD/JPY FORECAST - TECHNICAL ANALYSIS

USD/JPY sold off sharply on Wednesday following the subdued U.S. inflation report, with the exchange rate down nearly 1% and below the 155.00 handle in early afternoon trading in New York. If losses continue, support emerges at 154.65, followed by 153.15. Further losses from this point would expose the 50-day simple moving average and a key trendline at 152.75.

Alternatively, if buyers return and spark a bullish turnaround, resistance could materialize around 156.80, this week's swing high. Bulls will have a hard time taking out this barrier, but if they do, the pair could gravitate towards 158.00 and even 160.00. However, rallies towards these levels may not be sustained for long, given the risk of intervention in the currency market by the Japanese government.

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USD/JPY PRICE ACTION CHART

USD/JPY Chart Created Using TradingView

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