With three rate decisions on the docket, coupled with the ever-important U.S. nonfarm payrolls report, the first week of July could be a very volatile week in the currency markets. Worth noting, however, is the end of quantitative easing. This marks the first week that the Federal Reserve will not buy U.S. Treasuries, an action that has significantly debased the value of the U.S. Dollar over the past eight-months. However, with the key interest rate holding at its historic low of 0.25-percent, until the Federal Reserve begins to unwind its massively-expanded balance sheet, the effect could be limited. Nonetheless, as market participants price this in, July could mark the beginning of a strong U.S. Dollar bull-run.

Quantitative Easing Round Two Officially Over

On June 30, 2011, the Federal Reserve’s second round of Treasury bond buying, informally known as quantitative easing, or QE2 ended. With a QE3 program unlikely to occur, this marks the completion of an eight-month window in which the Federal Reserve purchased $600 billion worth of assets in an attempt to add liquidity to the market, and thus, stimulate the U.S. economy.

The coming week marks the first week in which the Federal Reserve will not conduct its permanent open market operations (POMO); since late August, when Federal Reserve Chairman Ben Bernanke announced the possibility of a second round of monetary easing, the U.S. Dollar has been down against every other major currency, falling the most against the Swiss Franc (-20.93 percent), the Australian Dollar (-17.67 percent) and the New Zealand Dollar (-16.33 percent). As the markets price in no further liquidity injections, this week will be pivotal in determining how the Dollar is viewed by market participants.

Reserve Bank of Australia Rate Decision (JUL): July 5 – 04:30 GMT

The Reserve Bank of Australia (RBA) will hold its July board meeting on Tuesday, where it is widely expected that the rate will be maintained at 4.75 percent. At the previous board meeting in June, the RBA decided to hold the rate steady at 4.75 percent, a level that has remained unchanged since November 2010. However, RBA Governor Stevens has indicated future rate hikes are possible to help contain inflation resulting from the country’s recent trade and mining boom. A softening credit market has been the driving force for delaying a cash rate hike.

The chances of a rate hike are low, according to the Credit Suisse Overnight Index Swaps. In fact, there is a -2.0 percent chance of a 25.0-basis point hike, which means there is a 2.0 percent chance of a 25.0-basis point rate cut. Similarly, only 6.0-basis points are priced into the Aussie over the next 12-months. Join a DailyFX analyst for live coverage of event!

Bank of England Rate Decision, Asset Purchase Target (JUL): July 7 – 11:00 GMT

The Bank of England’s Monetary Policy Committee is expected to maintain its official Bank Rate at 0.50 percent, while simultaneously holding its asset reserve purchase program at £200 billion. The primary driver for the decision is the MPC’s focus on economic growth rather than on reducing inflation. The country is facing an inflation rate of 4.5 percent, more than double its target of 2 percent. Policy makers agree that the economic outlook is not stable enough to withstand higher rates.

Traditionally, an inflation rate of this level would be a signal for the MPC to increase the bank rate but policy makers believe that inflationary pressures “will ease once food and oil prices come down.” On June 9, the MPC voted to maintain the official Bank Rate at 50-basis points, leaving it unchanged for eleven consecutive quarters, and the rate is expected to remain unchanged, with only a 3.0 percent chance of a 25.0-basis point rate hike.

European Central Bank Rate Decision (JUL): July 7 – 11:45 GMT

The ECB is widely expected to increase the key interest rate at its meeting on July 7th. With the ECB’s objective of keeping inflation below, but close to 2 percent in the medium term, ECB’s Trichet addressed current euro area inflationary concerns stating “strong vigilance is warranted.” This is largely indicative of an interest rate hike. At its meeting on June 9, the Governing Council decided to keep key ECB rates unchanged for the second month in a row, at 1.25 percent, though indicated that a hike could be in the near-futre; it appears that this meeting will be the ‘near future.’

The OIS is showing a 122.6 percent chance of a 25.0-basis point rate hike, which all-but-guarantees a hike, and accordingly, prices in a 22.6 percent chance of a 50-basis point rate hike. Expectations have been rising for future hikes, with 76.2-basis points priced into the Euro for the next 12-months. With the recent bailout of Greece and contagion fears to Spain and Italy looming, it will be interesting to hear Trichet’s comments on the health of the Euro-zone. Join a DailyFX analyst for live coverage of event!

U.S. Change in Non-farm Payrolls (JUN): July 8 – 12:30 GMT

According to a Bloomberg News survey, economists have forecasted that June data will reveal an increase of 90K in US Nonfarm Payrolls. While this represents a significant increase over the 54K increase in May, it’s still not a strong enough figure to bring down the unemployment rate, currently at 9.1 percent, where it is expected to have remained in June. Serving as a closely watched indicator of the employment situation, the increase would provide signs that the economy is healing, yet very slowly, especially after last month’s disappointing figure.

The Fed has recently revised forecasts downwards for GDP and unemployment given the bleak outlook for the economy. The rise in energy and commodity prices has curtailed spending in the first two quarters of 2011. Confidence remains low and consumer and investors remain cautious about spending. In the light of situation, hiring will remain at low levels for some time. The nonfarm payroll report has sparked uncommon volatility for Friday trading sessions, so expect to see significant price action before and after the data release.Join a DailyFX analyst for live coverage of event!

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

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report or be added to his distribution list, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX