Top 10 Forex Events Outlook: September 3-7, 2012

With the European Central Bank scheduled to announce its monetary policy decision and the U.S. nonfarm payrolls report to follow a day later, the week ahead could become pivotal for the future fate of the euro and the U.S. dollar as traders gauge the next moves by the two major central banks in the days leading to the ECB and the FOMC meetings.

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

1. AUD- Reserve Bank of Australia Interest Rate Announcement,Tues., Sep. 4, 12:30 am, ET.

As economic growth remains “close to trend” and with inflation below target, the Reserve Bank of Australia will not be in a hurry to change its existing monetary policy and is expected to keep the benchmark interest rate at the current 3.50% level. Just as he did at the previous meeting, Governor Glenn Stevens would probably express concern about the persistent strength of the Australian dollar, although the impact on the currency from such statement would likely be limited.

2. CHF- Swiss GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Sep. 4, 1:45 am, ET.

The Swiss economy could feel the negative impact of the contraction in the eurozone, which is Switzerland’s largest trading partner, with a slower 0.2% q/q growth in the second quarter of 2012 compared with 0.7% q/q in the first quarter. The economic slowdown coupled with persistent strength of the Swiss franc could prompt the Swiss National Bank to consider additional measures to weaken its currency in an effort to help exports and the tourism industry.

3. USD- U.S. ISM Manufacturing Index, a leading indicator of economic conditions measuring activity in the manufacturing sector, Tues., Sep. 4, 10:00 am, ET.

After a move into contraction territory with a drop to 49.8 in July, the U.S. manufacturing index is forecast to climb above the 50 boom/bust line with a reading of 50.1 in August.

4. AUD- Australia GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Sep. 4, 9:30 pm, ET.

The two-speed economy of Australia which is enjoying a booming mining sector while others like manufacturing and tourism suffer, is expected to grow at a slower pace by 0.9% q/q in the second quarter of 2012 from 1.3% q/q in Q1. With raw materials responsible for more than half of the country’s exports, the global economic slowdown and reduced demand from China could see the trend of slower Australian growth extending into the third quarter.

5. CHF- Swiss CPI- Consumer Price Index, the main measure of inflation preferred by the Swiss National Bank, Wed., Sep. 5, 3:15 am, ET.

Deflationary pressures are not expected to disappear quickly from the Swiss economy as the consumer price index spends another month below 0% with a reading of -0.4% y/y in August from -0.7% y/y in July. The threat of deflation and the rising Swiss franc were the reasons for multiple interventions by the Swiss National Bank a few years back and we should not be surprised to see the central bank maintaining its hawkish stance and reaffirming its commitment to defend the franc cap.

6. CAD- Bank of Canada Interest Rate Announcement, Wed., Sep. 5, 9:00 am, ET.

Compared with other major central banks, the Bank of Canada looks like the most likely candidate to tighten monetary policy but policy makers will not feel the need to do so at this meeting and probably not even until 2013. The central bank is expected to maintain its benchmark interest rate at the 1.0% level while reiterating its cautious outlook due to the “slowdown in global activity.”

7. GBP- Bank of England Interest Rate Announcement, Thurs., Sep. 6, 7:00 am, ET.

The Bank of England would probably decide to wait and see the moves of other central banks, especially the European Central Bank, before it pulls the trigger on more easing. This is why it looks more likely that the bank will keep its benchmark interest rate unchanged at 0.50%, leaving the door open to additional expansion of the Asset Purchase Program, probably in the last quarter of 2012.

In addition, we should not exclude the possibility that the Bank of England could be forced to consider a rate cut to supplement its QE efforts if the EU debt crisis escalates, or due to further local and global economic slowdown. The pressure on the GBP will intensify if the market begins to price such expectations.

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

Following the hawkish remarks of the ECB President in early August, many feel that an announcement of more bond buying by the ECB on September 6 is a sure thing. However, they could be disappointed if the European Central Bank decides to wait at least another week after its meeting for the September 12 vote of the German Constitutional Court on the validity of the permanent bailout fund- the European Stability Mechanism. This, of course, does not mean that there will be no more easing in upcoming months as the threat of recession looms over the eurozone economy and the EU debt crisis is still far from over.

It would not be surprising to see the European Central Bank producing another 25 bps cut in the final quarter of the year. Whether the ECB expands its already inflated balance sheet to buy bonds or announces an additional reduction in the benchmark rate, the euro should feel the pressure, especially if a rate cut makes it an even stronger contender for the title of preferred carry trade currency.

9. USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions measuring activity in the services sector, Thurs., Sep. 6, 10:00 am, ET.

The U.S. services sector is forecast to pick up the pace with a non-manufacturing index reading of 53.0 in August compared with 52.6 in the previous month.

10. USD- U.S. Nonfarm Payrolls and Employment Situation, the main indicator of U.S. economic health measuring job creation and unemployment, Fri., Sep. 7, 8:30 am, ET.

With the U.S. jobless claims establishing a trend of improvement in recent months and the economy adding more jobs than expected in July, it would be crucial for this trend to continue in order to steer the Fed away from announcing additional quantitative easing at its September meeting.

The consensus forecasts point to another month of decent job creation with the U.S. economy expected to add up to 150K jobs in August, compared with 163K in July, while the unemployment rate inches lower to 8.2% from 8.3%. The USD should be able to benefit from a more upbeat employment data. On the other hand, a disappointing nonfarm payrolls report would cement the market's expectations that QE3 is just around the corner, with the odds of a September 13 announcement increasing significantly.