Top Ten Forex Events: July 2-6

Three monetary policy meetings by major central banks and the U.S. Non-Farm Payrolls and Employment Situation report will kick-start the first trading week of the third quarter as traders await the next move by the European Central Bank and try to determine QE3 odds based on conditions in the U.S. labor market.

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.    JPY: Japan Tankan Index, a Bank of Japan quarterly survey of large and small businesses considered as the main indicator of economic conditions in Japan, Sun., Jul. 1, 7:50 pm, ET.

The consensus forecasts predict mixed results from the Tankan survey but with an overall positive bias as the manufacturing index stays at -4 in Q2 2012 compared with the same -4 reading in Q1 2012, while the non-manufacturing index inches higher to 6 in Q2 from 5 in Q1 2012.

2.    EUR: Euro-zone Manufacturing PMI- Purchasing Managers Index, a leading indicator of economic conditions measuring activity in the manufacturing sector, Mon., Jul. 2, 4:00 am, ET.

Another month in contraction territory would be the likely outcome of the final reading of the Euro-zone Manufacturing PMI for June with the index remaining at 44.8 as shown by the preliminary estimate.

3.    USD: U.S. ISM Manufacturing Index, a leading indicator of economic conditions measuring activity in the manufacturing sector, Mon., Jul. 2, 10:00 am, ET.

Although growing at a slower pace in recent months, the U.S. manufacturing and services indexes have managed to stay in expansion territory above 50 since December 2009. This trend is forecast to continue, but the U.S. manufacturing index is expected to pull back to 52.5 in June compared with 53.5 in the previous month.

4.    AUD: Reserve Bank of Australia Interest Rate Announcement, Tues., Jul. 3, 12:30 am, ET.

Despite of expectations that the Reserve Bank of Australia could refrain from further monetary policy easing at this meeting, there have been signs of weakness in the economy and the labor market “down under”, which if persistent, should raise the odds of additional rate cuts. Although the Australian central bank would be likely to keep the benchmark rate unchanged at 3.50% for the time being, pressures on the Australian dollar could mount if the central bank produces a surprising rate cut or signals an impending one in the upcoming months.

5.    EUR: Euro-zone Services PMI- Purchasing Managers Index, a leading indicator of economic conditions measuring activity in the services sector, Wed., Jul. 4, 4:00 am, ET.

Just as the manufacturing index, the Euro-zone services sector is forecast to register another month of contraction with an index reading of 46.8 in June, same as the preliminary estimate.

6.    EUR: Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Jul. 4, 5:00 am, ET.

A stronger than expected German GDP data was able to lift the overall GDP for the entire euro-area and show 0% q/q growth in the first quarter of 2012, compared with forecasts for a second consecutive quarter of economic contraction, which would have meant a double dip recession. The consensus forecasts point to a final confirmation of the flat 0% q/q reading in Q1 2012, compared with the 0.3% q/q contraction in the fourth quarter of 2011. However, the market could get caught by surprise if there is a downward GDP revision, which will weigh on the euro and will be in line with the signs of deteriorating economic conditions in recent months that could force the European Central Bank to take a more dovish stance at its meeting a day after the GDP report.

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

After a slim majority of Monetary Policy Committee members was able to keep the Bank of England from doing more quantitative easing last month, it is pretty much a given that the bank will opt for an expansion of its Asset Purchase Program in July due to the escalating EU debt crisis and the obvious signs of a global economic slowdown. The only unknown will be the size of the expansion, which would probably be in a range of 50 billion to 75 billion pounds. Although QE expectations look priced in for the most part, the GBP could feel the pressure rising ahead of the Bank of England's meeting.

8.    EUR: European Central Bank Interest Rate Announcement, Thurs., Jul. 5, 7:45 am, ET.

Following the Fed's decision to offer more easing by extending Operation Twist, the ball is now in the European Central Bank's court. The FOMC gathering was the first meeting by a major central bank following the Greek election and ahead of the EU Summit. As such, the Fed's monetary policy decision could serve as a policy-guiding decision for other central banks that could follow the Fed's foodsteps. This is why it will not be surprising to see the European Central Bank (and other central banks) in an easing mode. The Euro-zone economic growth 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 get engulfed by the debt crisis. The European Central Bank has three monetary policy easing options: buy more bonds, consider LTRO 3, or cut rates. As the threat of recession looms over the Euro-zone economy and with the EU debt crisis escalating, the rate cut option looks most likely to be deployed soon. A reduction in the benchmark interest rate to a new record low will not be euro-positive.

9.    USD: U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions measuring activity in the services sector, Thurs., Jul. 5, 10:00 am, ET.

The U.S. services sector is forecast to register another month of growth at a slower pace with a non-manufacturing index reading of 53.0 in June compared with 53.7 in the previous month.

10.    USD: U.S. Non-Farm Payrolls and Employment Situation, the main indicator of U.S. economic health measuring job creation and unemployment, Fri., Jul. 6, 8:30 am, ET.

Three months of weak non-farm payrolls data and an increase in the unemployment rate have prompted the Fed to pump additional $267 billion into the U.S. economy by extending Operation Twist. This time around, we could see some promising signs with consensus forecasts expecting stronger job creation as the U.S. economy adds 89K to 100K jobs in June, compared with 69K in May, while the unemployment rate stays at 8.2%. Otherwise, with the Fed making it clear that policy makers are prepared to do more if economic and labor market conditions deteriorate, another disappointing employment report will raise QE3 odds significantly and will weigh on the USD.