The Reds and the Gunners are the only two teams in the Premier League to have won both of their games this season to leave the two clubs joint top of the Premier League table.
Liverpool FC started their campaign with a 4-1 win over Norwich before sealing a 2-1 victory at Southampton last weekend.
Meanwhile, Arsenal were 1-0 winners at Newcastle United on the opening weekend of the season before a 2-1 victory over Burnley at The Emirates last Saturday.
Liverpool FC will be aiming to lay down a marker as they bid to establish themselves as title challengers once again this season.
Arsenal, meanwhile, are looking to at least break back into the top four after having made a number of key signings this summer.
However, former Gunners star Nicholas is tipping Liverpool FC to claim all three points with a 3-1 win in front of their home fans this weekend.
Speaking in an interview with Sky Sports, Nicholas said: “As a former Arsenal player, I’m dreading this game.
“It’s been a good start for Arsenal. They haven’t played fabulously well but they got a dogged win at Newcastle and then beat Burnley, which was a bit of a grind. But how are they going to defend against Liverpool?
“Arsenal have improved a bit defensively but it will take time. David Luiz could make mistakes or he could have a man-of-the-match performance. Sokratis doesn’t offer enough for me and they are still vulnerable in the full-back areas.
“Liverpool are strong favourites for me, but there is some intrigue in seeing Arsenal try and take on Liverpool’s defence at the moment, especially with Adrian in goal instead of Alisson.
“I think Arsenal should play a back four with two protectors in front. I don’t want Granit Xhaka in the team, I would prefer Lucas Torreira and Matteo Guendouzi. They would give Arsenal energy and defensive qualities. Then I would want Alexandre Lacazette through the middle and Pierre-Emerick Aubameyang and Nicolas Pepe to provide pace on the counter and make things happen, with Dani Ceballos just behind them.
“I’d have that line-up to give Arsenal a back six and then a front four that could cause Liverpool problems on the counter-attack.
“I think Unai Emery will go a bit more cautious and play Aubameyang with Lacazette on the bench, maybe along with Ceballos. If he does that then Liverpool will win.
“Arsenal have to look at a way to get the first goal and try to hurt Liverpool and put them on the back foot. However, I have a feeling Emery might be a bit more negative.
“Ceballos is very neat and tidy. Against Burnley, he looked a yard sharper than he did on the opening weekend and that’s a promising sign. He looks like a good player for Arsenal and I would start him.”
Liverpool FC came within a whisker of winning the Premier League last season when they ended up just a point behind Manchester City in the table.
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