We are expecting active and volatile trading in the first week of September. There is a lot of market moving US economic data due out this week in addition to four central bank rate decisions. Unfortunately, Ben Bernanke gave us few clues on what to expect from other central banks since he was as convoluted as ever on Friday. He said that the “Fed is ready to take additional actions as needed to provide liquidity,” while also warning that it is “not the Fed’s responsibility to protect lender and investors from the consequences of their decisions.” It took the combination of President Bush’s new program to help struggling homeowners and Bernanke’s comments to really drive the stock market higher. However, as usual, we look to the bond and currency markets for a more accurate assessment of how the financial markets felt about Friday’s comments and we see that both the Dow and carry trades failed to respond. This indicates that a rate cut from the Fed is still not a done deal, but in the meantime, there are many other things to worry about including the Bank of Canada, Reserve Bank of Australia, European Central Bank and Bank of England rate decisions. The RBA and BoE announcements should be nonevents since both are expected to leave rates unchanged and do not release a statement when they do so. The BoC and ECB rate decisions on the other hand should be big market movers for the Canadian dollar and Euro respectively. The BoC will need to decide whether they should hold onto their hawkish bias while the ECB will have to decide between raising rates and leaving them unchanged as well as their bias for the months ahead. In the US, we will get our first chance to see how bad the labor market may have deteriorated from the recent tightening of credit and blowups in the financial sector. July job growth was tepid and even though the market is currently looking for 109k jobs to be added to US payrolls, the drop in jobless claims last week raises the risk for a weak number. Even if payrolls are strong, the impact on the markets could be limited since traders will speculate on whether this strength can be sustained in September. This means a good number may not be good enough for the US dollar. In addition to NFPs, the US will also be the Fed’s Beige Book report along with service and manufacturing sector PMI. On Thursday a number of Fed officials are also slated to speak so watch out for any clarification on where the Fed stands and even if policymakers refuse to provide more clarity, the non-farm payrolls number should.

Euro: 3 Potential Outcomes of ECB Rate Decision
Next to the US non-farm payrolls report, the European Central Bank interest rate announcement on Thursday is the most important and potentially market-moving event this week. Typically the ECB lets the market know at least a month in advance what they plan on doing with interest rates. This time however, Trichet and company will have traders guessing up to the last second. There are three potential outcomes of this much anticipated rate decision. The first and the most unlikely is for the ECB to raise rates to 4.25 percent. This surprisingly hawkish move would be extremely positive for the Euro, taking the currency pair back above 1.3700. The second scenario is for the ECB to leave rates at 4 percent, drop the words strong vigilance and add some other dovish comments that would allude to interest rates remaining unchanged for the remainder of the year. This would be extremely bearish for the Euro, taking it back below 1.3550. The third scenario would be for the ECB to leave interest rates unchanged and either keep the words strong vigilance or other equally convoluted and slightly hawkish comments, which would leave the door open for further rate hikes and be only slightly bearish for the Euro.

British Pound: Strong Manufacturing Data Should Buy the BoE Time
The British pound is outperforming the Euro for the fourth trading day, thanks to stronger than expected UK manufacturing activity. The market was looking for a decline, but the strongest level of output growth in close to 13 years drove the index to a 3 year high of 56.3. Although the overall report is hawkish, the drop in both output and input prices will keep the Bank of England on hold this week. The lack of significant inflation pressures should buy the central bank time, allowing them to continue monitoring financial and credit market conditions before deciding whether to press forward with another rate hike.

Carry Trades Could Face Further Resistance
The fact that carry trades did not respond to the rally in equities on Friday and bond yields were basically unchanged tells us that risk aversion in the market is still high and traders in different asset classes are not necessarily buying into a Fed bailout. Although the relationship between the Dow and carry trades broke down on Friday, the fact that the Dow’s rally stopped short of significant technical resistance (the 100 and 50-day SMA as well as the 61.8% Fibonacci Retracement of 14021-12517) does suggest that carry trades could face further pressure this week. This risk is compounded by the likelihood of many central banks turning dovish and signaling that interest rates could remain unchanged for the remainder of the year. The further deterioration in Japanese labor cash earnings and capital spending has had little impact on the Yen as the market is still focused on risk or no risk.

Australian and Canadian Dollar Strengthen Ahead of Interest Rate Decisions
The Australian and Canadian dollars have appreciated ahead of their respective interest rate decisions. Their central banks will be the first to announce where they stand on monetary policy. The Australians have it easy since they don’t say anything when they leave rates unchanged. The Canadians on the other hand have to justify their decision. There is a strong chance that the Bank of Canada will drop their hawkish monetary bias given the global tightening of credit and the potential impact of weaker US growth. GDP in the second quarter was much stronger than expected, but that too is predicted to slow. Meanwhile Australia will be releasing its Q2 GDP report tonight. On a quarter to quarter basis, growth is expected to slow materially.

Kathy Lien is the Chief Currency Strategist at FXCM.