The dollar continues to appreciate after yesterday’s strong labor market data and the latest dovish comments from the ECB president, Lagarde. Yesterday’s ADP report showed employment growth of 324,000, compared to significantly lower expectations of 190,000. If the good ADP data are confirmed by Friday’s NFP reading, it may encourage the Fed to continue raising interest rates at the September FOMC meeting. The discrepancy between NFP and ADP was quite large last month, but growth above 200,000 NFP would still give a very high chance of a Fed hike in September. Analysts’ estimates assume a publication at the level of 200,000. Currently, the market is pricing an 82% chance of no hike at the next September meeting of the Fed. However, these estimates could still change significantly if subsequent data continue to show a strong labor market and rebounding inflation.

This last, more hawkish sentiment favors the appreciation of the dollar, which, after reaching a medium-term peak at the level of 1.12640, continues to correct downward. Historically, the announcement of the end of the interest rate hike cycle almost always coincided with a weakening of the dollar, regardless of the macroeconomic situation. Recent comments from Jerome Powell indicate that the Fed would like to see sustained low inflation and a weakening labor market. For this reason, recent strong NFP publications raise questions about a pause or end to the hikes. A continuation of the strengthening of the dollar could cause the EURUSD pair to retest the level of 1.0855.

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