Four Key Events Ahead for the Forex Market This Week

11/04/2008 10:17 am EST

Focus: FOREX

US ISM Non-Manufacturing-November 5

Conditions in the US non-manufacturing sector, which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance, are anticipated to worsen in October as the Institute for Supply Management index is estimated to fall to 48.0 from 50.2. Indeed, consumer confidence remains exceptionally weak, as the Conference Board's measure fell to a record low of 38 during the same month. The key thing to watch is to see if ISM Non-Manufacturing falls below the 50 mark (signaling contraction), as the news will only add to bearish sentiment on the US economy following the 0.3% contraction in US Q3 GDP.

Bank of England Rate Decision-November 6

The Bank of England is widely anticipated to follow up their October 8 rate cut with yet another 50 bp cut to 4.00% on November 6 at 7:00 ET, as the UK economy tips into recession and the financial markets remain unstable. While UK CPI remains well above the BOE's 2% target and 3% ceiling at 5.2%, weaker commodity prices have led inflation outlooks around the world to drop rapidly. Furthermore, BOE Monetary Policy Committee member David Blanchflower, who has long been the most dovish of all the members since joining the Committee in mid-2006, was staunch as ever in his bias when he noted that he thought deflation was a bigger concern than inflation, and that CPI may fall from the September reading of 5.2% down to 1%, or could even go negative. Mr. Blanchflower also said that UK interest rates must be lowered significantly and quickly. If the BOE does indeed cut rates, the news will likely weigh on the British pound. However, if the central bank signals that they may leave monetary policy unchanged going forward, GBP/USD could easily surge higher.

European Central Bank Rate Decision-November 6

A Bloomberg News poll of 50 economists shows that the European Central Bank is very likely to cut rates by 50 bps to a near two-year low of 3.25% on Thursday at 7:45 ET. Indeed, economic conditions have deteriorated rapidly throughout the region, with the October PMI readings showing that business activity in the euro zone's manufacturing and services sectors has been contracting for five consecutive months. Meanwhile, Eurostat's estimate of euro zone CPI shows that price growth eased to a 3.2% pace in October from 3.6%. Given European Central Bank president Jean-Claude Trichet's more bearish stance on the economy and the bank's participation in the October 8 coordinated rate cuts, the indications of cooler inflation pressures gives the ECB even more room to cut rates on Thursday. The reaction of the euro, however, may depend more on Mr. Trichet's post-meeting press conference at 8:30 ET, as his speeches tend to be very straightforward and biased. If Mr. Trichet suggests that the ECB will cut rates further, the euro is likely to take a hit, but if he signals a more neutral stance going forward, the currency could actually rebound.

Canadian Net Employment Change, US Non-Farm Payrolls-November 6

Though often finding its thunder has been stolen by its US counterpart, history shows that the Canadian employment change is consistently a top market moving indicator. Employment in Canada is a clear sign of economic health and an indicator of expansion going forward. However, the reading for September showed that the Canadian labor markets added on a record 106.9K workers, and there is a chance this will be revised lower, or the October reading will show a sharp contraction at 7:00 ET. This will be followed at 8:30 ET by US non-farm payrolls (NFPs), which haven't consistently produced a strong reaction from the US dollar. Nevertheless, as one of the most watched US economic indicators, the release of the index is worth keeping an eye on. NFPs are forecasted to contract for the 10th consecutive month, by 180K, while the unemployment rate is anticipated to jump to a more than five-year high of 6.3% from 6.1%. Overall, both releases present major event risks for the Canadian and US dollars, leaving the USD/CAD pair, in particular, prone to heavy volatility.

By Terri Belkas, Currency Strategist,

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