The euro-dollar pair continues to trade in a narrow price range in anticipation of the release of US inflation data. The phlegm of traders is quite understandable, because tomorrow's report on the growth of the consumer price index may well redraw the fundamental picture for the pair. A further rise in inflation (especially the core CPI) will open the door to a 75-point rate hike in September.
The high probability of the implementation of this scenario was discussed last Friday, when the nonfarm payrolls report surprised the markets with its green color (almost all components of the release turned out to be better than expected). If inflation reports come out at least at the forecast level, the dollar will receive significant support in the wake of the growth of hawkish expectations. But if the releases disappoint, the greenback will find itself in a difficult situation, since not all experts are confident that the majority of the regulator's members will maintain an aggressive pace of tightening monetary policy.
In particular, Goldman Sachs currency strategists said that the published report on the US labor market will not encourage Fed members to increase the rate by 75 points. But if Nonfarms are strengthened by inflation, then the scales will still lean towards a more hawkish decision. To date, the forecast of Goldman Sachs regarding the September meeting is more moderate—an increase in the rate by 50 basis points.
In other words, the upcoming inflation reports may provoke significant volatility for the EUR/USD pair, so market participants are in no hurry to open large positions on the eve of high-profile events. Note that the consumer price index will be published tomorrow, and the producer price index – the day after tomorrow. However, the market mood will be determined on Wednesday, after the publication of the CPI. There is very little time left to wait, so traders do not risk investing in the dollar or getting rid of it.
The EUR/USD pair continues to drift in the range of 1.0120–1.0280, within which it has been trading for the third week in a row. Apparently, this situation will continue until tomorrow's release. According to the results of the publication, traders are likely to try to leave this price corridor, and the direction of the price will depend on the "color" of the inflation report. In such conditions, it is very risky to open trading positions, given the high degree of uncertainty.
If we talk about the fundamental picture of today, it is necessary to pay attention to another factor: the foreign exchange market ignores the so-called "Taiwan case." Although US House Speaker Nancy Pelosi's visit to Taiwan did not go unnoticed: Beijing launched unprecedented military exercises around the island, during which the military fired at least 12 missiles and at least one of them flew directly over the island. And today, the People's Liberation Army of China announced new exercises in which it will surround Taiwan.
According to the representative of the Ministry of Defense of the People's Republic of China, the purpose of the exercises is "the encirclement and defense of the island of Taiwan." In turn, the Minister of Foreign Affairs of Taiwan said that the military exercises of the Chinese army are "training for the future capture of the island." At the same time, he added that during the exercises, China "repeatedly violated the unofficial dividing line in the strait and called on the international community to prevent Beijing from seizing control in the region."
As we can see, the situation is far from de-escalating. However, defensive assets (such as the dollar and the yen) ignore the tension around Taiwan. Apparently, the prevailing opinion in the market is that China's actions are demonstrative and rather for the "internal audience" of the PRC, on the eve of the Communist Party congress in the autumn.
In addition, today the authoritative publication Politico published a calming material on this topic. According to the publication, the Pentagon still believes that China will not invade Taiwan in the next two years. With reference to high-ranking officials of the US Department of Defense, Politico journalists confirm the version that the ongoing military exercises of the PRC are not preparations for an imminent invasion, but rather a political action.
Thus, geopolitics has now faded into the background for the EUR/USD pair. Traders have switched to classic fundamental factors, so the focus is on US inflation reports, which will be published tomorrow and the day after tomorrow.
Given the prevailing fundamental background, it is best to take a wait-and-see attitude for the pair. As a more risky alternative, we can consider the option of opening short positions on upward pullbacks. However, this option looks very doubtful, given the rather low volatility that is observed today. Therefore, before the publication of the report on the growth of the consumer price index, it is best to stay out of the market.
