The EUR/USD pair is in a narrow range, with boundaries confined to the 5th figure. Mixed fundamental signals have kept traders cautious: both bulls and bears are hesitant to open large positions, preferring to remain in a wait-and-see mode. The market is frozen in anticipation of a significant impetus that could either strengthen the greenback's position or weaken it, allowing bulls to consolidate within the 6th figure and, in the long run, test the resistance level at 1.0700 (the Tenkan-sen line on the weekly chart). But for now, traders must work with mixed signals. For example, US inflation is showing signs of slowing down (the core CPI, the core PCE index, wage indicators), while, on the other hand, price pressures remain stubborn (the general consumer price index, the PPI). Such mixed results have not helped either the bears or the bulls of EUR/USD. After a brief decline, the pair returned to the territory of the 5th figure.
The status as a safe-haven asset doesn't allow the dollar to advance further, as market sentiment has been volatile recently. For instance, the recent attack on a hospital in the Gaza Strip triggered turbulence in the oil market (Brent crude oil increased by 2%, staying above the $90-per-barrel mark). However, the currency market has reacted relatively calmly to this tragic event. The fact that Israel postponed the ground operation in Gaza (which, according to some reports, was scheduled to start over the weekend) fuels hopes for a political resolution of the conflict rather than a military one. Many observers believe that the scales will tilt one way or the other in the coming days. It's difficult to predict which way that will be. With US President Joe Biden's visit to Israel on Wednesday (it's evident that Israel will make certain decisions), traders are in no hurry to open significant trading positions in favor of or against the dollar. Nevertheless, they remain highly responsive to the current news flow surrounding the Middle East conflict.
The strength in China's latest economic data also proved to be quite contradictory. On one hand, China's GDP growth in the third quarter slowed from the previous quarter, but, on the other hand, it exceeded the consensus estimate. The Chinese economy expanded at a 4.9% annual pace in July-September. But that was much slower than the 6.3% annual growth rate of the previous quarter. So, technically, we're seeing a downtrend. However, there are a few "buts" here.
First, the indicator fell within the "green zone" because experts had predicted more modest growth (4.4%). Second, the relatively strong second-quarter result was largely due to the low base effect, as in the second quarter of 2022, China had implemented a "zero-tolerance COVID policy," including strict quarantine restrictions (even in major megacities like Shanghai). Third, apart from GDP data, other macroeconomic indicators were just published in China, most of which exceeded experts' forecasts. For instance, China's industrial output in September grew 4.5% from a year earlier, matching the pace in August and surpassing experts' forecasts, which had predicted 4.1% growth. Retail sales increased by 5.5% Y/Y, surpassing the 4.8% expected and 4.6% of the prior quarter. This is the strongest result since May.
Take note that in recent months, China has rolled out policies to try to stabilize the property market and the banking sector, while simultaneously strengthening support for the country's stock market and its national currency. Good results in the second quarter further complemented the general picture. The combination of these fundamental factors was expected to raise interest in risky assets. However, the focus is currently on the Middle East. As reported by Bloomberg, the conflict could develop along several scenarios. One scenario involves the involvement of third countries (Iran, Syria, Lebanon). In that scenario, oil prices could soar to $150 a barrel and global economic recession.
We don't know which specific scenario will unfold. However, what we do know is that traders are highly responsive to news about this topic, ignoring "classic" fundamental factors. For example, the greenback reacted positively to news that the United States vetoed a UN Security Council resolution from Brazil calling for the relocation of Gaza residents to the southern sector. Amid risk-averse sentiments, the dollar index returned to the 106 level, and the EUR/USD pair dropped back to the lower band of the 5th figure.
This indicates that geopolitics remains at the forefront. Geopolitical factors are overshadowing the "classic" fundamental factors, forcing traders to react to rapidly changing news from the Middle East. In such uncertain conditions, it's often advisable to stay out of the market because it is difficult to predict the direction of the Middle Eastern conflict, if not impossible.
