The recent narrowing of the spread between real interest rates in the EU and the US, although belatedly, helped the EURUSD to recover; the pair tested levels above parity, while the dollar index approached local highs (level 109 and above) again. Additional pressure on the European currency is exerted by the risks of a complete halt of gas supplies to the EU via the Nord Stream pipeline. The weak ADP report triggered a mild dollar reaction as market participants wait for a verdict on the state of the labor market in the NFP report on Friday.

At the beginning of the week, there was some divergence in the dynamics of the European currencies against the dollar on the currency market. Traders discounted the risks associated with gas supplies from the Russian Federation, which allowed the Euro and SEK to strengthen, while the British pound sterling remained under significant selling pressure. However, early buyers of the Euro will have to endure a stress test as the Nord Stream pipeline goes into maintenance today for three days and there is a risk that deliveries will not resume once work is completed. The resumption of supplies is likely to be positive news that will lure more buyers into the European currency. ADP estimated US job growth at 133K in August, down from 270K in July and 380K in June:

If the NFP report shows that the pace of US job growth remained at a solid pace, then this will give even more confidence to the Fed that expeditious and significant rate hikes is justified and there is no reason to slow down the pace of tightening. For risk assets, this is clearly a negative scenario, but given the current conditions (today's ADP report), markets are likely to be preparing for a moderate or negative NFP surprise on Friday, so the US stock market will most likely consolidate near current levels. The S&P 500 will probably not be able to break through the 3950 mark.

Loretta Mester and Raphael Bostic will be speaking today, and will likely continue to build on Powell's rhetoric, convincing investors that raising rates is justified and economic activity will have to be sacrificed to bring inflation back under control.

Eurozone inflation data made little impression on the Euro as the ECB signaled at Jackson Hole that it is ready to consider a 75 bps hike in September. Traders price in tightening of 70 basis points, which means that the scenario of an aggressive outcome of the ECB meeting in September has actually become the baseline. An improvement in the gas supply situation, particularly if the risks from the non-resumption of gas supply after maintenance do not materialize, will most likely allow the pair to test 1.01-1.0150. However, a strong NFP report remains a risk for such a scenario.