US Dollar Price Action Setups: Carry Trade in Jeopardy Ahead of US CPI

The USD/JPY carry trade remains strong, driven by the interest rate disparity between the US and Japan. The pair has been in a bullish trend since 2022, when it broke above the 150.00 level. However, the recent intervention by the Bank of Japan has created a theoretical cap to upside, making bullish USD/JPY setups at or above 160 challenging.

The next major test for the USD/JPY pair will be this week's CPI data release in the US. A below-expected print could shake longs out of the trade and drive a sell-off, similar to what happened in November 2022 when the headline CPI was at 7.1% and Core CPI was at 6.3%. This would create a counter-trend setup for USD/JPY.

Elsewhere, the DXY index is facing resistance around 99.42, making it difficult to chase lower. A daily bar close as a hammer or dragonfly doji could indicate bounce potential and set up a higher-low. EUR/USD and GBP/USD may present opportunities for USD-weakness, with the former already pricing in the expected 25 bps rate hike by the ECB.