The EUR/USD pair has been trading within a narrow range for two days following a spike on Tuesday. The American currency now looks vulnerable, but the euro does not look too brave either. Recent events both in Europe and the United States arouse more questions than answers. Therefore, traders are in no hurry to open either long or short large positions. As a result, the pair has come to a standstill in anticipation of a powerful information driver. Tomorrow's US nonfarm payrolls may serve as such a driver, especially if the actual figures are better than expected. The same is true about the eurozone's CPI. So, the situation looks extremely uncertain. Both the euro and the dollar are under fundamental pressure that does not allow traders to determine the trajectory.
The single European currency suffered today due to Brexit problems. As a rule, the euro is unaffected by the news on the Brexit negotiation process, but in this case the situation is different. Let me remind you that yesterday the British parliament approved in the third (that is, in the final) reading a bill that crosses out some points of the Brexit Agreement. Although the bill has not yet been approved by the House of Lords (the upper house of parliament), Brussels' reaction was immediate. Representatives of the European Commission sent to London an official letter of notification that Britain has violated the agreement approved by the country to leave the European Union. Remarkably, this letter is not a formality, but one of the stages of the legal process, which may eventually lead to a lawsuit. The UK now has one month to respond to the European Commission's appeal. If there is no response, or if the British response does not satisfy Brussels, European lawyers will move on to the next stage of the procedure. A political dispute may end up with a lawsuit in the Luxembourg court. By a court decision, the UK can face significant fines, and a trade war may begin between the UK and the European Union, in which the EU will impose sanctions on British exports. This is the most negative scenario, but it cannot be ruled out.
The response from the European Commission hit the pound first of all. However, the prospects for litigation between London and Brussels and even a trade war affected the European currency. In addition, weak data on German inflation, which was released yesterday, also caps the growth of the European currency, especially in the context of tomorrow's release on inflation in the euro area. Forecasts are rather pessimistic: according to analysts, the CPI will remain in the negative area and is expected to slow down to -0.1%. Core inflation is likely to show also a negative dynamic. Experts believe that the core index will come out at 0.3%. If September inflation figures in Europe come out at least one tenth of a percent lower than expected, the euro will come under strong pressure.
The US dollar is also weighed down by fundamental problems. Democratic and Republican lawmakrers have resumed talks on additional aid to the American economy. The market is already skeptical about such news: the parties held similar negotiations almost all summer, but eventually they reached a dead end. According to the latest news from Capitol Hill, the viewpoints of Democrats and Republicans still differ significantly. Speaker of the House of Representatives Nancy Pelosi announced this today. If lawmakers come to a compromise solution, the greenback will strengthen across the board, no matter what data the nonfarm payrolls will reveal tomorrow. But if the negotiations drag out again, then the US data on the labor market will be in the focus of traders' attention.
According to the consensus, September Nonfarms are expected to show strong results. The US provate sector should add almost a million (980 thousand) jobs, and the level of average hourly wages on an annualized basis may rise to almost 5 percent (4.8%). The unemployment rate, in turn, should decline to almost eight percent (8.1%). For your reference, in April this indicator was at almost 15%.
Thus, EUR/USD has got stuck sideways for obvious reasons. Friday will be loaded with events, so traders do not risk opening large positions. If European inflation disappoints, and Nonfarms, on the contrary, encourage investors, then the bears will push the pair to the level of 1.16. Otherwise, (strong inflation in the eurozone with catastrophically weak Nonfarms), buyers can push the pair towards 1.18 (possibly testing the 1.1920 level). If the indicators spring some surprises (some data will disappoint and some will come out in the "green zone"), then in this case the market will have to decide on sentiment, which, in my opinion, will be in favor of the US dollar. Plus, don't forget about the negotiations in Congress. Any decision made by the negotiators will have a strong impact on the market - the only question is who will benefit from this volatility.
Taking into account such a hard puzzle, it is better to avoid trading EUR/USD for a while. Investors are braced for extreme volatility tomorrow.
