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Bank of America Flags EUR/USD and USD/JPY Vulnerability Ahead of US CPI Report
Summary
Bank of America analysts have identified the EUR/USD and USD/JPY currency pairs as particularly susceptible to volatility from the upcoming U.S. inflation data, with each positioned for different reactions depending on the outcome.
The euro-dollar and dollar-yen currency pairs are positioned for significant moves following this week's U.S. Consumer Price Index (CPI) release, according to an analysis from Bank of America. The firm's strategists see a path for a stronger dollar against the euro if inflation is high, and a weaker dollar against the yen if inflation proves soft.
Dollar Awaits Inflation Catalyst
Bank of America previously noted on July 6 that the U.S. dollar needed a new catalyst to determine its next directional move. The upcoming CPI report is widely seen as a pivotal data point that could provide that impetus, influencing Federal Reserve policy expectations and investor sentiment.
Scenarios for Key Currency Pairs
BofA's analysis outlines two distinct scenarios hinging on the inflation reading, highlighting vulnerabilities based on technical and market sentiment indicators.
Ad- EUR/USD: The pair appears vulnerable to a stronger-than-expected inflation report. The bank pointed to deteriorating sentiment and momentum against the euro, noting that options market flow and skew shifted in favor of puts last week. A hot CPI print could "open the door for the EUR/USD downtrend to extend," according to the firm.
- USD/JPY: Conversely, a trade betting on a decline in USD/JPY is viewed as attractive if inflation data comes in soft. A bearish reversal signal in Bank of America’s technical matrix suggests the pair's uptrend is becoming increasingly fragile. The firm added that its valuation signals indicate the pair may be due for some mean reversion.
Market Positioning and Technicals
The bank's outlook suggests that recent market positioning has made these two pairs particularly sensitive to an inflation surprise. The shift toward puts in the options market for EUR/USD indicates traders may be hedging against a potential decline. For USD/JPY, technical and valuation signals suggest the pair's recent rally could be overextended, making it susceptible to a pullback on any news that eases pressure on the Federal Reserve to maintain a hawkish stance.
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