EUR/USD Pair Consolidating in a Tight Trading Range in October

The EUR/USD is trading at 1.11964, but it is up 2.63% for the year to date. Over the past 3 months, the pair is up 0.71%. For the past 1 month, the pair has slumped 0.86%. Over the course of the past 5 days, the pair is down 0.28%. The pair is heavily influenced by macroeconomic data releases from the US and the EU. These include nonfarm payroll data in the US. The nonfarm payrolls data in the US increased by 156,000 in September 2016. This was sharply lower than the August figure of 167,000. Market consensus for August was 175,000 new jobs. July data was revised sharply lower to 252,000 from 275,000. Between June 2016 and September 2016, NFP data decreased from 271,000 in June to 252,000 in July 2016. In August 2016, the number declined to 167,000 and it moved sharply lower to 156,000 in September.

Now, futures markets are pricing in a rate hike for December 14, 2016. According to the latest CMEGroup FedWatch tool, the following stats have been reported:

• For Wednesday, November 2, 2016 – There is a 91.7% of the interest rate remaining at 0.25% – 0.50%. There is an 8.3% probability of rates rising to 0.50% – 0.75%.
• For Wednesday, December 14, 2016 – There is a 34.9% chance of rates remaining at 0.25% – 0.50%. There is a 60% likelihood of rates rising to 0.50% – 0.75%. And there is a 5.1% chance of rates rising to 0.75% – 1.00%.

The average earnings improved from 0.1% to 0.2%. According to the futures markets, the odds of a rate hike are higher for December. The FOMC (Federal Open Market Committee) statement indicates that there is an increased likelihood of rates rising by December. This boosts the prospects for a stronger USD. The probability of a rate hike is dependent on additional financial data coming in. While jobs numbers have increased somewhat, the available financial data has been insufficient to warrant a Fed rate hike.

The EUR/USD pair has not moved substantially. Currency strategists have seen a test of the December 2015 low and the Brexit low. And since the 200-day MA for the EUR/USD pair has broken lower (as at Thursday 6 September 2016). The rapid demise of the GBP/USD currency pair on Thursday maintained pressure on the EUR/USD currency pair. This is likely to determine the direction of trading on Monday 10 September 2016. The upcoming Fed FOMC meeting in November is going to bring a degree of pressure to bear on the markets, notably the EUR/USD pair and the GBP/USD pair. It is precisely this ‘lower channel line’ that will remain in play during the coming weeks.

Why Do NFP Data Releases Drive USD Strength?

Investors tend to place significant emphasis on nonfarm payrolls data owing to the importance of this indicator on overall economic performance. The release of NFP data on Friday 7 October saw plenty of activity with dollar bulls. This is evident in the performance of the greenback in 3 major currency pairs, including the EUR/USD (plunged below 1.1150) and the USD/JPY pair which rose above 104. But it was the GBP/USD pair which hit its lowest point (a 31-year low). But the USD/JPY currency pair moved the most with a seventh day of gains and no pullback in 8 days already. The much-anticipated December rate hike is dependent on how quickly the labour market improves. This is unlikely to happen in November 2016, meaning that the EUR/USD pair will like remain in a tight trading range for the short-term. It should be noted that the case for a rate hike has strengthened, but with earnings growth missing forecasts and an insufficient number of jobs created, the case for a December hike is certainly more likely than a November rate hike.

The last 2 NFP data releases have missed the mark, but all bets are on for a December rate hike. This will boost the USD and weaken the EUR/USD pair. We can expect net short positions on the pair over the next 2 months.