Trading Week Outlook: October 31 - November 4, 2011

by: All Things Forex

With many unknowns still lingering after the rally fueled by the EU Summit’s new plan to contain the sovereign debt crisis, the first trading week of November could prove crucial for the fate of the financial markets, the euro and the U.S. dollar as the G20, the Fed and the European Central Bank convene to chart the direction of their future policies.

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. EUR- Euro-zone HICP- Harmonized Index of Consumer Prices, the main measure of inflation preferred by the European Central Bank, Mon., Oct. 31, 6:00 am, ET.

Following the surprising spike in inflationary pressures to 3.0% y/y in September from 2.5% y/y in the summer months, the Euro-zone’s main inflation gauge is forecast to show consumer prices holding up near the 3.0% y/y level with a preliminary estimate of 2.9% y/y in October. The inflation spike came only a week before the European Central Bank’s October meeting and was one of the factors keeping the central bank from cutting rates then. However, if inflation slows along with the Euro-zone’s economy, the odds of an ECB rate cut will increase exponentially.

2. AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Oct. 31, 11:30 pm, ET.

Last week’s unexpectedly hawkish Reserve Bank of New Zealand stance shocked the markets as New Zealand’s central bank begged to differ from all other major central banks which have made it clear that they are steering further away from tightening in an effort to stimulate growth. Although the Reserve Bank of Australia would be likely to keep the benchmark rate at the current 4.75% level, even the slightest hint of a similar to the Reserve Bank of New Zealand’s view that rates might need to be adjusted higher at some point in the future, could serve as a catalyst for further strengthening of the Australian dollar. On the other hand, a dovish Reserve Bank of Australia statement, opening the door to rate cuts, would be a major risk factor for the higher-yielding commodity currency “down under”.

3. GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Nov. 1, 4:30 am, ET.

Growing by only 0.1% q/q in Q2 2011, the U.K economy is forecast to regain momentum by up to 0.4% q/q in the third quarter of 2011. The GBP could enjoy a bit of a boost on stronger Q3 growth, provided the recent risk rally continues to distract the market from the fact that the Bank of England expanded its Asset Purchase Program by 75 billion pounds and is in the process of doing more quantitative easing.

4. USD- U.S. ISM Manufacturing Index, a leading indicator of industrial activity, where a reading above or below 50 is the dividing line between economic expansion and contraction, Tues., Nov. 1, 10:00 am, ET.

The U.S. manufacturing sector index is forecast to gain strength for another month with a reading of 52.2 in October from 51.6 in September, continuing the sequence of cautiously optimistic U.S. economic data ahead of the Fed’s monetary policy announcement.

5. USD- U.S. ADP-Automatic Data Processing Employment Report, a measure of jobs lost or added to the private sector of the economy, also serving as a leading indicator for the outcome of the monthly non-farm payrolls, Wed., Nov. 2, 8:15 am, ET.

In a prelude to Friday’s employment report, payrolls in the private sector of the U.S. economy are expected to register an increase by up to 114K in October compared with the 91K new payrolls added in September.

6. USD- U.S. FOMC- Federal Open Market Committee Interest Rate Announcement, Wed., Nov. 2, 12:30 pm, ET.

The recent U.S. dollar weakness was fueled not only by the return of risk appetite but also by increased QE3 market speculation. Some members of the FOMC have been “warming up” to the idea of more quantitative easing and even calling for it. Although QE3 is not completely out of the picture yet, the Fed might decide that the prudent thing to do at the moment is to acknowledge the recent signs of improvement in the U.S. economic backdrop and to allow a few more months to asses the impact of “Operation Twist” before they take on additional asset purchases at the expense of the U.S. dollar. If the Fed rules out QE3, the greenback could start correcting some of its recent losses.

7. EUR- G20 Meeting of finance ministers and central bankers of the world’s twenty most industrialized nations, Thurs., Nov. 3 and Fri., Nov. 4, all day events.

Scheduled to serve as another deadline to work out more details of the EU debt crisis-fighting plans, the G20 meeting participants will examine closely all aspects of the promised comprehensive solutions and will ask for fast implementation, while the EU reps try to pass the tin can asking for contributions to the EFSF bailout fund, which is about 750 billion euro short of its proposed 1 trillion size. The EU leaders hope for a significant Chinese participation in EFSF, but with China making it very clear that they want guarantees and that they should not be viewed as a “source of dumb money”, the G20 meeting will be a spectacle worth watching.

8. EUR- European Central Bank Interest Rate Announcement, Thurs., Nov. 3, 8:45 am, ET.

With plans to contain the EU debt crisis and the ECB involvement still being discussed, President Trichet leaving and the new President Draghi taking over, the European Central Bank would have the difficult task to navigate through a sea of uncertainty. To add to the difficult situation, the Euro-zone economy is slowing, while inflationary pressures have unexpectedly spiked. What is the central bank to do- cut rates to help the economy avoid a double dip or keep rates high to curb inflation? Considering his past record, Mr. Trichet would have preferred the latter option, but the new ECB President Draghi may have something else in mind. Should the ECB announce, or at least open the door, to an impending rate cut, the EUR could see selling pressures building up quickly, especially if the Fed has ruled out QE3 the day before the ECB meeting.

9. USD- USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions in the services industries: agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, Thurs., Nov. 3, 10:00 am, ET.

Just as the manufacturing sector, the U.S. services industry activity is forecast to expand for another month with an ISM Non-Manufacturing index reading of 53.5 in October from 53.0 in September.

10. USD- U.S. Non-Farm Payrolls and Employment Situation Report, one of the most important indicators of economic health, measuring the number of new jobs created or lost in the world’s largest economy, Fri., Nov. 4, 8:30 am, ET.

The most important of all U.S. economic data will hit the newswires in the aftermath of the FOMC and the ECB interest rate announcements and in the midst of a G20 meeting. Kick-starting the market’s quest throughout October to find out if the U.S. economy is really as bad as the Fed’s gloomy outlook painted it to be ahead of the FOMC meeting on November 1-2, the previous Non-Farm Payrolls report managed to instill some cautions optimism with the U.S. economy adding 103,000 jobs in September, compared with a sequence of dismal employment reports throughout the summer. The trend of positive job creation is expected to continue with the U.S. economy adding up to 95,000 jobs in October, while the unemployment rate remains unchanged at 9.1%. Consistent improvement in the U.S. economy and labor market, coupled with signs that the EU leaders may be able to put out the fire from the debt crisis, while the ECB cuts rates to help the euro-area economy avoid a double dip, should steer the Fed further away from QE3 and could become the formula for a U.S. dollar relief rally.