US Dollar: US NFPs and Three Rate Decisions May Favor Additional Strength

•    US ISM Manufacturing (JAN) – February 1, 10:00 ET
The January reading of ISM manufacturing is projected to slip to 55.2 from 55.9, but this would still indicate an expansion in US business activity for the sixth straight month. Indeed, production, new orders, and export orders gained steadily throughout Q3 and Q4, highlighting how the manufacturing sector has been key to recovery in the US. Furthermore, the employment component may help to serve as a gauge of how US non-farm payrolls will fare on February 5. That said, manufacturing-specific reports like the Dallas and Richmond Fed indicators have signaled improving conditions during January, creating some upside risks for ISM manufacturing.

•    Reserve Bank of Australia Rate Decision – February 1, 22:30 ET
According to Bloomberg News, the Reserve Bank of Australia (RBA) is likely to raise rates for the fourth straight month by 25 basis points to 4.00 percent. Meanwhile, Credit Suisse overnight index swap (OIS) rates are pricing in a 67 percent chance of a 25 basis point rate increase, signaling a slight risk that the central bank will not follow through. Looking even further ahead, OIS rates are pricing in 98 basis points worth of hikes over the next 12 months, which is down substantially from October, when they were pricing in just over 200 basis points in increases. As a result, the RBA’s rate decision and policy statement could prove critical to the AUDUSD outlook in the near-term. The RBA struck a more neutral tone during their last meeting, but with Q4 CPI results signaling that inflation is on the rise, tighter monetary policy seems to be in the cards. However, another neutral policy statement that suggests the RBA will leave rates unchanged during their next meeting could ultimately weigh the Australian dollar down.

•    Bank of England Rate Decision – February 4, 7:00 ET
The Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement. This has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated that they would likely wait until their February meeting before considering any changes to the Asset Purchase Facility (APF), which is currently aiming to purchase £200 billion worth of high quality assets. At this point, the markets are betting that the BOE will end the program altogether, which has to the potential to push the British pound higher. However, if the central bank suggests that they could still add to the program later in the year, the currency is likely to falter.

•    European Central Bank Rate Decision – February 4, 8:30 ET
The European Central Bank is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET. Where the currency ends the day, though, may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Traders will likely focus on any comments regarding the future of interest rates in the region, including statements on exit strategies for the central bank’s liquidity programs, the economic outlook, and how they may deal with Greece’s fiscal problems (if at all). At the time of writing, Credit Suisse overnight index swap rates were pricing in 85.2 basis points worth of hikes by the ECB over the next 12 months, but indications that the central bank foresees a quicker recovery in growth or inflation could push these expectations, and the euro, higher.

•    Canadian, US Employment Reports (JAN) – February 5, 7:00 ET - 8:30 ET
At 7:00 ET, the Canadian net employment change for the month of January may start off 2010 on a strong note by rising by 15,000, following a decline of 2,600 in December.  However, the unemployment rate is anticipated to hold steady near the 11-year high of 8.7 percent at 8.5 percent. Nevertheless, since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a surprise drop likely to weigh on the currency and an unexpectedly strong result likely to push it higher.

At 8:30 ET, the US non-farm payroll index (NFP) is forecasted to show that the labor market gained jobs - approximately 13,000 - for only the second time since December 2007. At the same time, the unemployment rate is projected to remain just below its 26-year high of 10.2 percent at 10.0 percent,  but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the few reports that impacts the US dollar from a pure fundamental point of view. A better-than-anticipated result is likely to provide a boost to the US dollar, but it will be interesting to see the impact of disappointing results as weak US data tends to weigh on risky assets and push the greenback higher amidst flight-to-quality.

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

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