This week, a total of four central banks will meet, including the Federal Reserve, Bank of England, European Central Bank, and Reserve Bank of Australia. However, only a few of these rate decisions have the potential to spark volatility in the forex markets, especially since all of the banks are expected to leave interest rates unchanged. Meanwhile, traders should keep an eye out for the US ISM services report along with Canadian employment data, as both indicators could lead to choppy price action for the US dollar and Canadian dollar.
• US ISM Non-Manufacturing – August 5
Conditions in US non-manufacturing sector – which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance – are anticipated to worsen slightly in July as the Institute for Supply Management index is estimated to fall to 48.0 from 48.2. Indeed, consumer confidence remains exceptionally weak, though it did improve slightly during July as the Conference Board’s measure unexpectedly rose to 51.9 from 51.0. The key thing to watch is to see if ISM Non-Manufacturing falls below the 50 mark – signaling contraction for the second consecutive month – the news will only add to bearish sentiment on the US economy. On the other hand, if the index actually improves, speculation will mount that the Federal Reserve will issue hawkish commentary when the FOMC meets later this week.
• Federal Reserve Rate Decision – August 5
Heightened uncertainty surrounding the US Federal Open Market Committee’s interest rate decision at 14:15 EDT virtually guarantees volatility across almost all asset classes - making it the most important event to watch in the week ahead. Economists overwhelmingly expect the Federal Reserve to leave rates steady at 2.00 percent. In fact, fed fund futures are actually pricing in a 25bp rate hike to 2.25 percent by October, while overnight index swaps are pricing in 75bps worth of rate increases over the next year. Indeed, hawkish commentary by various FOMC members and indications of persistent inflation pressures have led the US dollar to rally in anticipation of a change in the course of monetary policy going forward. However, the US economy is still facing a major slowdown, if not an all-out recession. As a result, the central bank is highly unlikely to raise rates quite yet. Traders should look for our FOMC preview on www.dailyfx.com on Monday for other factors to watch, such as wording in the policy statement.
• Bank of England Rate Decision – August 7
The Bank of England is expected to leave rates steady on Thursday at 5.00 percent for the third month in a row as rocketing inflation pressures prevent the Monetary Policy Committee from focusing on tighter credit conditions and the collapse of the UK housing sector. The rate decision will come at 7:00 EDT and since the MPC is anticipated to leave rates unchanged, they are unlikely to issue a monetary policy statement which should leave the market’s reaction to the news very muted. Nevertheless, if UK economic indicators released earlier in the week prove to be very disappointing and weigh on the British Pound, the currency could actually surge on the rate announcement on Thursday.
• European Central Bank – August 7
Like the Bank of England, the European Central Bank is widely expected to leave rates steady at 4.25 percent after hiking by 25bps in July. The rate announcement will come at 7:45 EDT, but the big show is at 8:30 EDT when ECB President Jean-Claude Trichet will give his monthly press conference. Will he remain hawkish, or focus more on the slowdown in the economies that compose the Euro-zone? Estimates for Euro-zone CPI in July jumped to a fresh 16-year high of 4.1 percent from 4.0 percent, which is well above the ECB’s 2 percent target as energy and food costs remain high. Furthermore, the Bank of Spain said last Wednesday that “upside risks for inflation in the Euro-zone are high.” There’s little doubt ‘price stability’ will be the foremost concern for Trichet, but if he suggests that a broad economic slowdown could bring price pressures down in coming months, the Euro could actually sell-off across the majors.
• Canadian Employment Change – August 8
When we refer to Non-farm Payrolls (NFPs), we are typically talking about the US labor market report. However, there’s another labor market report to watch that may be even more market-moving: the Canadian net employment change at 7:00 EDT. This release is essentially “the other NFP” report, as the data tends to be highly market-moving for the Canadian Dollar and rarely meets estimates. Last month, the net employment change proved to worse than forecasts and led the USD/CAD pair to jump sharply in the minutes after the news hits the wires. Traders should expect to see similar volatility this time around, though they should keep in mind that follow-through during the rest of the day tends to be limited. Check in to see what other traders think about the USD/CAD pair and the Canadian data post-release in the DailyFX USD/CAD Forum.
[B]See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
Questions? Comments? E-mail: <[email protected]>[/B]