EU inflation is set for another record high

According to a report released earlier Wednesday, French price growth slowed in August by more than expected, edging down from its highest level since the early 1990s.

Harmonizing with the European Union's methodology, the country's closely watched consumer price index rose by 6.5%, down from 6.8% in July.

Although this fall in consumer spending is welcome, separate data showed that French consumer spending slumped 0.8% in July compared to a revised 0.1% increase in June. Evidently, historically high inflation levels negatively impact personal spending in the Eurozone's second-largest economy.

While Europe's gas prices have backed down from record highs, they are once again rising as Russia has closed the Nord Stream pipeline to Germany for the second time in a few months.

Euro and yen against the dollar

With the Nord Stream pipeline closure raising fresh risks of a complete supply cutoff, that process of realigning EUR/USD with its 2-year swap rate differential (which is the highest since March) may well halt or at least be reversed. It may be difficult for EUR/USD to break above 1.0100, and downside risks may persist for the rest of the week.

Early Wednesday morning in Europe, bears tightened their grip on USD/JPY as they retested the daily bottom around 138.30. The pair snaps a three-day uptrend. However, if there are no signals from Japanese policymakers that aim to mitigate the USD/JPY divergence, the divergence between the Fed and the BOJ might keep USD/JPY buyers hopeful.

While sticky in the short term, inflation may have peaked in the US following the recent decline in fuel prices. However, it is also clear that the Fed doesn't just want to contain inflation. And instead, it wants to start pushing it back down quickly.

Events of the day

All eyes will be focused on releasing the latest Eurozone consumer price index later in the session. It is expected that European inflation reached a record high of 9% or higher in August, further pressuring the European Central Bank to aggressively raise interest rates next month.

Moreover, today's ADP payrolls report will provide further insight into whether last month's resilience in the US labour market is also being seen in the private sector. Consequently, the numbers might not track this Friday's numbers in the same manner. It is expected that 300k jobs will be added in August.