Following a string of poor U.S. data, the latest downside surprises today nL1N2120EI nL1N2120IN heighten market concerns that slowing growth will lead the Fed to adopt a softer tone next week that will constrain EUR/USD within its current range. The U.S. Treasury yield curve shifted lower while eurodollar and fed funds futures increased the odds of a Fed rate cut in 2020.
A further dovish shift by the Fed would align it more closely with the ECB hesitance to hike. With both central banks seeing eye-to-eye on risks to growth, EUR/USD would be hard-pressed to find a catalyst to break out of the 1.1200-1.1600 that has held since October 2018.
Option volatility supports the range-bound view as 1-month at the money vol EUR1MO=FN has traded to a new trend low and levels not seen since August of 2014.
The dearth of volatility suggests traders do not expect significant movements in either direction for EUR/USD.
Significant improvement in euro zone growth that would lift bund yields or a drastic deterioration in U.S. growth that could induce Fed rate cuts could break the range, but that appears to be a distant prospect now.
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