EUR/USD Comes into Focus with ECB Rate Decision and NFP’s on Tap

The EUR/USD will come into focus this week with an ECB rate decision and the U.S. Non-farm payroll report on tap. A hawkish ECB President Trichet and a rise in U.S. unemployment could be the catalyst for a bullish rally in the pair. German labor data and American manufacturing data could also raise the outlook for an increase in the yield spread between the two economic powers. The results will also have a broader impact on global sentiment giving the importance of the two economies and could lead to a week of volatility, which was kicked off by additional stimulus from the BoJ.

• German Unemployment Change (AUG) – Aug 31– 07:55 GMT

Early forecasts are for the number of unemployed in Germany to have declined for a thirteenth straight month by 20,000. An improving labor market will eventually give way to higher wages which is the greatest source of headline inflation and a major concern for the ECB. If the labor market begins to tighten in the region’s largest economy then the central bank may consider raising rates in an effort to maintain price stability. A higher outlook for interest rates should benefit the single currency especially against the dollar on the potential for the yield spread to widen.

• Canadian GDP (2Q) – Aug 31 – 12:30 GMT

Canadian GDP is expected to have improved by 0.2% in June with growth at a 2.5% pace in the second quarter. Economic expansion in the commodity driven economy is showing signs of slowing-down from 6.1% in 1Q- as the inventory cycle comes to an end and government stimulus evaporates. Weaker than expected activity could dim the outlook for yields and weigh on the “loonie”, as markets are currently pricing in a 56% chance of a 25 bops rate hike by the BoC at their next policy meeting. Conversely, better than expected results could keep the central bank’s tightening policy on track supplying Canadian dollar support.

• U.S. ISM Manufacturing (AUG) – Sep 01– 14:00 GMT

There is little doubt that manufacturing has been the main driver of the U.S. and global recovery, which is why the unexpected contraction in the Philadelphia Fed reading to -7.7 from 5.1 sparked a flight to safety and concerns of a double dip recession. The Institute of Supply Management’s monthly survey is the most important gauge for the sector’s health, expectations for a slower pace of expansion to 52.8 from 55.5 will adding to the dimming growth outlook. An unexpected contraction (a reading below 50) could ignite dollar support on safe haven flows. However, the greenback could get penalized on lower yield expectations as odds increase the Fed will lag its counterparts in removing stimulus. Traders may start to increase bets that additional stimulus will come from the central bank as the look to head off another economic contraction.

• ECB Rate Decision – Sep 2 --11:45 GMT

The European Central Bank will convene this week to decide future monetary policy and is widely expected to keep their benchmark rate at 1.00%. President Trichet’s statements following the release will present the event risk for the Euro. A change in the ECB’s prevailing rhetoric from “rates remain appropriate as risks remain balanced” could spark volatility in the single currency. Any signs that the recent rise in inflation is a concern for the committee -whose sole mandate is price stability- could significantly raise the outlook for yields in the region. Speculation is growing that policy makers will extend their lending support for banks, despite raising growth forecasts. The conflicting actions could send a muddle message leaving markets directionless.

• U.S. Non-Farm Payrolls (AUG) – Sep 3 – 12:30 GMT

The U.S. unemployment rate is expected to have risen to 9.6% from 9.5% in August as the economy lost another 100,000 jobs. Although the majority of the new unemployed are attributed to census workers, the forecast for a 46,000 gain in the private sector is tame giving the strong growth to start the year and the consistent strength of corporate profits. Therefore, a third consecutive six figure monthly job loss by the world’s largest economy could spark a flight to safety leading to dollar support and continued Yen and Franc strength.

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

Send questions or comments to jrivera@dailyfx.com