Overnight Developments:

• Yesterday, after decent global manufacturing data (contractionary, but better than expected), US ISM manufacturing index fell to 49.7!
• 
• Suppose combining that with Euro-zone unemployment at 11.1%, the market is interpreting bad news as good news, as it means more chance of central bank action.
• ECB meets on Thursday, expectation is they will lower rates, and that BOE will re-start bond buying, helping to support risk.
• Gold’s rise today could indicate that Fed action may not be too far behind… The focus then turns to June’s NFP figures.

NFP & Fed:

• If NFP comes in substantially below the 90K-95K forecast, then bad news is good news as it means more chance that Fed will act and risk can gain.
• Weakness in manufacturing and in job growth is certainly not good for global growth, so this reaction will be tricky.
• Those playing the macro side will want to offload risk, while those playing monetary policy expectations will want to buy risk. We face this battle often nowadays.
• IF NFP hits status quo, market will keep guessing on QE.
• IF NFP surprises to top side, less chance of QE, though will market be disappointed by that and actually sell off risk as a result?

RBA Rate Decision:

• Held rates steady. The question now is “is the bank done with its rate cut campaign?”
• Employment has been strong of late.
• Building approvals surged 27.3%, biggest monthly gain on record. A result of lower rates?
• GDP surprised to upside.
• But, trade deficits have been negative, China extends its slowdown, consumer confidence is at lows for the year, and manufacturing posted a 4th month of contraction.
• Stronger AUD means inflation is not a concern.
• Most likely, any further moves will rest on how the situation in Euro-zone develops.

UK Data Soft:

• UK data soft as Construction PMI falls into contractionary territory – 48.2 vs 54.4 in May, and undershooting forecast of 53.1.
• Weakest since Dec 2009, holiday blamed for part of the slump, but weaker underlying business also.
• Also, M4 Money Supply was down 0.1% in May, also lower than forecasts of a 1.4% gain.
• Tomorrow, UK posts its Services PMI, forecasts is for 53.0 reading compared to 53.3 in May. A sharp slide here would seal the deal for more QE (£50 bn) from BOE.

US Releases This Week:

• Wednesday is a bank holiday in the US.
• Still have US ISM Services data as well. If it falters (forecast is 53.1 vs 53.7 in May) then calls for action from Fed will grow.
• Today, factory orders will give us a leading indicator for the manufacturing sector.
• Forecast here is for a 0.1% gain in May after a 0.6% decline in April.

ECB Rate Decision Awaited:

• Forecast that ECB cuts rates below 1%, bringing interest rate to record low.
• ECB may also think about lowering the deposit rate (the amount paid to banks to hold their reserves with the ECB) in an attempt to get more money into the economy.
• Another LTRO round not expected because of lack of good collateral in banking system.
• Lower interest rates should help periphery, but would weaken the interest rate differential of EUR vs rivals.

Theme of This Week Remains:

• Does the risk rally from EU Summit extend or get faded?
• As markets have more time to digest the ramifications of EU Summit, and realize that implementation will take time, will it take some of the shine of the agreement?
• At the same time, markets will be looking for clues as to central bank policy which will be front and center this week with ECB and BOE, and the reaction to NFP which is still key report for gauging what the Fed does next.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com – provider of  News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.