Currency traders will likely focus next week on the Federal Reserve's statement following its policy meeting on Tuesday, looking for signs the central bank's concern about inflation has changed due to concerns about credit quality in US markets.
The Fed is widely expected to keep interest rates steady at 5.25 percent at its policy meeting, but there is concern that rising defaults in the US subprime mortgage market, the failure of several lenders and hedge funds, and the postponement of several large corporate financing deals, may slow economic growth.
"The biggest thing next week will be the Federal Reserve but it won't be what they do, it will be any commentary on the credit contraction that is going on," said Andrew B. Busch, global FX strategist at BMO Capital Markets in Chicago.
Busch said market volatility is calming down and expects the euro/dollar to trade between 1.3500 and 1.3750 with dollar/yen to change hands between 117.50 and 120.50. The euro/dollar was last at 1.3717, up 0.6 percent for the week, with dollar/yen at 118.89, up 0.2 percent for the week.
Because of concerns about credit markets and the ability of consumer to borrow and spend, US data on consumer credit, with consumers forecast to have borrowed $7.3 billion in June, will be another focus.
"One of the biggest concerns is whether US consumers will stop spending," said Andrew Bekoff, chief investment strategist at Printz Capital Management in Philadelphia. "If we see a drop in consumer credit, people will be concerned we have a credit squeeze."
US productivity and unit labour costs, forecast to have climbed 2.0 and 2.1 percent respectively in the second quarter, will be another economic highlight, Bekoff said. Both reports are scheduled for release on Tuesday.
Bekoff suggests the euro/dollar will trade between 1.3550 and 1.3800 in the week ahead. Dollar/yen will trade from 118 to 120 yen. Bekoff like Busch expects the Fed to stand pat at its one-day meeting on Tuesday.
Nick Bennenbroek, head currency strategist at Wells Fargo in New York advises investors to look for any measures of volatily surrounding credit spreads and any headlines regarding credit generally.
He says the Fed is likely to be a "non event" where they will both keep interest rates and their "boiler plate statement" unchanged. The euro/dollar should trade between 1.3550 and 1.3800, Bennenbroek says, with dollar/yen between 118 and 121.
But elsewhere around the globe, job reports in New Zealand on Wednesday, Australia on Thursday and Canada on Friday could cause some short-term movements in the currencies, particularly with a solid Canadian report bolstering the case for a Canadian rate hike, Bennenbroek said.
The Bank of Canada next meets on September 5. Bennenbroek also expects The Reserve Bank of Australia to hike its key cash rate by 25 basis points to 6.5 percent when it meets in Australia on Wednesday (Australian time). The New Zealand dollar/US dollar last traded at US $0.7659, up 0.7 percent for the week, the Australian dollar/dollar at US $0.8567, up 1 percent for the week and the US dollar/Canadian dollar at C$1.0557, down 0.8 percent for the week.
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