Top Ten: The Forex Week Ahead

With the European Central Bank and the Bank of England meetings on the horizon, the EUR and GBP will take center stage in the week ahead as traders wait to find out if the two central banks will resort to additional monetary policy easing.

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, Mon., Feb. 4, 10:30 pm, ET.

The Reserve Bank of Australia finds itself at a difficult junction with overheating housing market, while manufacturing, services and even the once booming mining sector are slowing. To stimulate economic activity, another 25 bps rate cut is a possibility. On the other hand, lowering rates could fuel further rise in the already dangerously high property prices. Considering these factors, in their first meeting for 2013 policy makers might decide that the prudent thing to do would be to sit on the sidelines and maintain the benchmark interest rate at the current 3.00% level. The Australian dollar will see pressures mounting if the central bank reduces rates or keeps the door open to rate cuts in the months ahead.

2. EUR: Euro-zone Services PMI, a leading indicator of economic conditions measuring activity in the services sector, Tues., Feb. 5, 4:00 am, ET.

Although forecasts point to a slight improvement, the euro-zone non-manufacturing sector is expected to contract for another month as the services index remains below the 50 boom/bust line with a reading of 48.3 in January.

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

December is usually the best shopping month of the year, but that might not be the case in the euro-area with retail sales forecast to drop by 0.3% m/m, compared with the 0.1% m/m increase in November.

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

The U.S. services sector activity is forecast to expand for another month, but at a slower pace, with the non-manufacturing index pulling back to 55.8 in January from 56.1 in December.

5. AUD: Australia Employment and Unemployment Rate, the main gauges of labor market conditions measuring job creation and unemployment, Wed., Feb. 6, 7:30 pm, ET.

After losing 5,500 jobs in December, the Australian economy is forecast to add up to 6,500 jobs in January, while the unemployment rate rises to 5.5% from 5.4% in the previous month.

6. GBP: U.K. Industrial Production, the main gauge of industrial activity measuring the output of factories, mines and utilities, Thurs., Feb. 7, 4:30 am, ET.

Industrial activity in the U.K. is expected to gain further traction with 0.7% m/m increase in December, compared with 0.3% m/m in November.

7. EUR: Germany Industrial Production, the main gauge of industrial activity measuring the output of factories, mines and utilities, Thurs., Feb. 7, 6:00 am, ET.

The unimpressive industrial sector performance of the largest economy in the euro-zone is forecast to continue with a smaller 0.1% m/m increase in December, compared with 0.2% m/m in the previous month.

8. GBP: Bank of England Interest Rate Announcement, Thurs., Feb. 7, 7:00 am, ET.

With the U.K. economy contracting in the final quarter of last year and triggering triple-dip recession fears, the odds have risen that the Bank of England may have no other choice but to consider another expansion of its Asset Purchase Program, while maintaining the benchmark interest rate at the record low 0.50%. Even if policy makers decide that easing monetary policy is not needed at this point, the pound, which has come under pressure recently, could head even lower if the market continues to price expectations of more QE by the Bank of England.

9. EUR: European Central Bank Interest Rate Announcement, Thurs., Feb. 7, 7:45 am, ET.

Euro-area leaders may be optimistic about the prospects of a future recovery, but the current reality is that the euro-zone is in recession and there is a chronic contraction in its manufacturing and services sectors. At its February meeting, the European Central Bank could decide to wait for more data (like the Q4 2012 GDP estimate due on February 14), but if growth remains nowhere to be seen and the EU debt crisis flares up again with political uncertainty rising ahead of the Italian election, it might not be too long too long before we witness additional monetary policy easing, including another rate cut. For the time being, the euro is taking advantage of the market's expectations that the Fed will continue to push the QE pedal to the metal while the European Central Bank sits on the sidelines, but that could quickly change as we have witnessed in the last couple of years.

10. JPY: Japan Current Account, an important measure of foreign trade, Thurs., Feb. 7, 6:50 pm, ET.

Helped by a weaker yen which started to come under pressure since early November, Japan’s account deficit is expected to shrink to 144.2 billion in December following a jump to 222.4 billion yen in the previous month. However, if the deficit unexpectedly rises, the report could give further impetus to yen selling on expectations that deteriorating economic conditions will force the Japanese government and the Bank of Japan to announce additional measures to weaken the currency and to stimulate the ailing economy.