Following the release of the unexpectedly strong Nonfarms, bears of the euro-dollar pair got a chance to fall to the area of the 9th figure, namely under the support level of 1.0970. However, sellers did not seize the opportunity - primarily because of the vulnerability of the US currency, which is waiting for important environmental events. Tomorrow we will find out data on inflation in the US, and also listen to Jerome Powell, who will summarize not only the results of the December meeting of the Federal Reserve, but also outline the prospects for further steps next year.
Of course, the US labor market has provided significant support to dollar bulls - for example, thanks to this release, the EUR/USD pair suspended its growth and retreated by nearly a 100 points. But, as it turned out, even the strong Nonfarms are unable to radically turn the tide over the pair. Traders are accustomed to the positive dynamics in the labor market - the bearish reaction was mainly due to the previous ADP report, which showed an extremely low result (69 thousand). The contrast with the official numbers (+266 thousand) made it possible for EUR/USD bears to return the pair to the framework of the 10th figure. But sellers need stronger arguments to develop a full-blown downward trend.
Meanwhile, bulls are not wasting time. The business sentiment indices published today by the ZEW Institute in Germany and throughout the eurozone helped the European currency regain its position not only in tandem with the dollar, but throughout the market.
The German indicator in December showed the strongest growth over the past two years. For the first time since April, the indicator was above zero and reached 10.7 points - this is the best result since February 2018. By the way, the recently published index of business activity in the manufacturing sector in Germany (PMI) also appeared in the green zone: instead of the projected decline, it has slightly increased, and growth has been recorded for the second straight month. And although this indicator remained below the key 50-point level, the trend itself provided background support for the euro.
However, despite a slight correctional growth, the EUR/USD pair still remains within the price range of 1.0970-1.1090, the boundaries of which it cannot leave for the second month. Traders are waiting for the key events of this week, and most of them will happen tomorrow. Key data on inflation in the United States will be released at the beginning of the US session. According to the consensus forecast, the general consumer price index will show contradictory dynamics - the indicator should slightly increase (up to 2.0%) in annual terms, while it should slightly decrease on a monthly basis up to 0.2%. Core inflation should completely repeat the trajectory of October: 0.2% MOM, 2.3% YOY.
It is important for dollar bulls that these indicators come out at least at the forecast level. Otherwise, representatives of the dovish wing of the Fed will again focus on the weak growth of inflation indicators. Let me remind you that the index of personal consumption expenditures published at the end of November (which measures the core level of expenditures and indirectly affects the dynamics of inflation in the United States) came out worse than forecasts: it fell to 0.1% in monthly terms, continuing the negative trend. On an annualized basis, the indicator also decreased (to 1.6%), although experts expected it to remain at the previous level (1.7%). The level of population spending showed a slight increase (0.3%), although a consensus forecast indicated an increase to 0.5%.
It is worth noting here that Fed Chairman Jerome Powell said a few months ago that the regulator would not even think about tightening monetary policy until key inflation indicators return to sustainable growth. I believe that he will repeat this thesis tomorrow - in one interpretation or another. With a high degree of probability, the Fed will hint a wait-and-see attitude tomorrow, even if the November inflation fails or vice versa - it will pleasantly surprise you. The fact is that the Fed is now caught in the grip of conflicting fundamental factors.
On the one hand, the growth of US GDP (the indicator for the third quarter was revised upwards), strong Nonfarms, a decrease in unemployment to a 50-year low and a slowdown in the rate of decrease in investment in fixed assets.
On the other hand, there are problems in the manufacturing and export sectors. The ISM manufacturing index slumped to 48.1 points, contrary to analysts' forecasts, who expected its growth in November. The ISM composite index for the non-manufacturing sector also came out in the red zone, not reaching forecast values: instead of rising to 54.5, it fell to 53.9 points. The producer price index and industrial production also showed a downward trend. All these are the negative consequences of a trade war, which may continue in the near future. The United States could impose additional duties on Chinese imports ($160 billion) on December 15, forcing China to resort to retaliatory measures.
According to the Wall Street Journal, the White House is currently discussing an option to postpone this decision (presumably until mid-January or February). However, there is no official confirmation of this. Given the continuing uncertainty regarding the prospects for global conflict, the Fed is unlikely to voice too hawkish or dovish intentions - Powell will adhere to expectant tactics, maintaining the appropriate balance in his statements. Traders will have to decide on their own - "the glass is half empty or half full." If the regulator nevertheless admits the probability of a rate cut in 2020, the dollar will fall under a sell-off, and the EUR/USD pair will again be consolidated within the 11th figure. In other cases, the market reaction will be either restrained or briefly bearish. As with the Nonfarm release, bears can pull the price to the bottom of the 10th figure, with the further intention of testing the support level of 1.0970. But given the upcoming meeting of the ECB (which will take place on Thursday) to open major positions tomorrow is impractical, regardless of the outcome of the meeting of Fed members. Indeed, Christine Lagarde can radically redraw the fundamental background for the EUR/USD pair on Thursday.