Friday's weaker-than-expected jobs numbers have ramped up expectations that the central bank could announce a third round of bond buying at the close of its two-day meeting Sept. 13. This so-called quantitative easing would involve printing money and would lower U.S. bond yields, two factors likely to weaken the dollar.
The Labor Department reported Friday that 96,000 jobs were added in August, fewer than expected. The unemployment rate fell from 8.3% to 8.1%, mainly because thousands of unemployed workers stopped looking for jobs.
"The weak report leaves the door to future [easing] wide open but the question is whether this is the meeting to pull the trigger,
Some market participants say that with other recent indicators, including auto sales, pointing to an improving U.S. economy, the Fed may not be in such a rush to announce more bond-buying. Instead, it may simply extend the window where it expects to keep interest rates near zero.
A slew of U.S. economic data are slated for next week but the most important--retail sales and consumer sentiment--are scheduled for Friday, after the Fed's meeting is over.
A German constitutional court decision Sept. 12 on the legality of two euro-zone bailout vehicles poses a major risk for the euro. If the court were to rule that the temporary European Financial Stability Facility and the permanent European Stability Mechanism are unconstitutional, it would call into question the central infrastructure the monetary union's 17 member nations have used to calm the debt crisis.
It would also hamper the latest bond-buying plan announced by the European Central Bank on Thursday, which pumped the euro higher and brought down the cost of borrowing for Italy and Spain.
Since the German parliament has already approved the bailout mechanism, chances of the German court rendering it illegal are very low, said Marc Chandler, currency strategist at Brown Brothers Harriman, adding "it does pose some risk."
The Dutch election Sept. 12 is another risk: victory for the Dutch Socialist Party could strike a blow to the German-led group of euro-zone members that favor fiscal austerity as a solution to the region's troubles.
Finally, the European Commission will release its proposal for bank regulatory reform Sept. 12. It is expected to push for sweeping oversight of euro-zone banks by the ECB.
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