Forex Outlook: The Week Ahead

With the FOMC and the European Central Bank scheduled to announce their monetary policy decisions in less than 24 hours of each other and the U.S. Non-Farm Payrolls and Employment Situation report to follow, the week ahead could prove crucial for the future of the euro and U.S. dollar.

In preparation for the new trading week, here is the outlook for the Top 10 economic events that should move markets around the globe.

1. USD- U.S. Consumer Confidence, a measure of consumers’ outlook on the economy, Tues., Jul. 31, 10:00 am, ET.

In light of the lack of improvement in the labor market, the outlook of U.S. consumers is expected to be less optimistic, pressing the consumer confidence index lower to a reading of 61.5 in July compared with 62.0 in the previous month.

2. USD- U.S. ADP Employment Report, a measure of job creation in the private sector of the U.S. economy, Wed., Aug. 1, 8:15 am, ET.

Job creation in the U.S. private sector is forecast to slow with up to 120K jobs added in July compared with 176K jobs in June, sending a warning signal ahead of Friday’s Nonfarm Payrolls data.

3. USD- U.S. ISM Manufacturing Index, a leading indicator of economic conditions measuring activity in the manufacturing sector, Wed., Aug. 1, 10:00 am, ET.

After dipping in contraction territory with a drop to 49.7 in June, the U.S. manufacturing index is forecast to climb above the 50 boom/bust line with a reading of 50.2 in July.

4. USD- U.S. FOMC Interest Rate Announcement, Wed., Aug. 1, 2:15 pm, ET.

The Fed's policy-guiding decision to pump an additional $267 billion into the U.S. economy by extending Operation Twist triggered monetary policy easing measures by other central banks. The meeting in August could have the same effect, especially if the Fed announces another round of quantitative easing. The Fed Chairman has made it clear that he is prepared to do more as U.S. economic data in recent months has failed to convince policy makers that the economy and labor market are improving. That's why it would not be shocking to witness a QE3 announcement as early as August 1, or after the Fed's next meeting on September 13. QE3 expectations will continue to weigh on the USD.

5. GBP- Bank of England Interest Rate Announcement, Thurs., Aug. 2, 7:00 am, ET.

Although the Bank of England is not expected to announce more quantitative easing in August and would be likely to keep its benchmark interest rate unchanged at 0.50%, the QE door is not completely shut and we could see an expansion of the Asset Purchase Program in the last quarter of 2012 due to the escalating EU debt crisis and the global economic slowdown. Moreover, the Bank of England might even be forced to consider a rate cut to supplement its QE efforts. The pressure on the GBP will mount significantly when the market begins to price such expectations.

6. EUR- European Central Bank Interest Rate Announcement, Thurs., Aug. 2, 7:45 am, ET.

Additional ECB easing might not come as early as the August meeting, but the threat of recession looms over the euro-zone economy and the EU debt crisis is escalating, which would present no other choice for the European Central Bank but to give in to the political pressure and ease monetary policy further in upcoming months. Growth in the euro zone is still nowhere to be seen and the future of the euro looks more and more uncertain as the euro area's third and fourth largest economies become snared by the debt crisis. It would not be surprising to see the European Central Bank announce another 25 bps cut at its August meeting, though the chances greater we'll see a rate cut in September/October. An additional reduction in the benchmark rate would make the euro an even stronger contender for the preferred carry trade currency title and should accelerate its downtrend.

7. USD- U.S. Jobless Claims, an important gauge of labor market conditions measuring first-time claims for unemployment benefits, Thurs., Aug. 2, 8:30 am, ET.

Large swings in the jobless claims data in recent weeks have made it difficult to judge if there is a trend of improvement and this report might not be very different as the volatility in the data continues with a jump to 375K from 353K the previous week.

8. EUR- Euro-zone Retail Sales, an important gauge of consumer spending measuring sales at retail establishments, Fri., Aug. 3, 5:00 am, ET.

As the services sector in the euro zone shrinks for another month, retail sales are expected to follow suit with a flat 0% m/m reading in June compared with 0.6% m/m in May.

9. USD- U.S. Nonfarm Payrolls and Employment Situation, the main indicator of U.S. economic health measuring job creation and unemployment, Fri., Aug. 3, 8:30 am, ET.

Three months of weak economic and labor market data have prompted the Fed to pump an additional $267 billion into the U.S. economy by extending Operation Twist and could force the central bank to consider another round of quantitative easing. Even if the Fed refrains from announcing QE3 on August 1, another disappointing employment report will raise QE3 odds significantly and weigh on the USD. The consensus forecasts point to a bit stronger, but unimpressive job creation by the U.S. economy looks to add 100K jobs in July, compared with 80K in June, while the unemployment rate should stay unchanged at 8.2%.

10. USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions measuring activity in the services sector, Fri., Aug. 3, 10:00 am, ET.

The U.S. services sector is forecast to pick up the pace with a non-manufacturing index reading of 52.6 in July compared with 52.1 in the previous month.