U.S. traders have finally returned from their long weekend holidays, but the price action in the FX markets suggests that they are in no mood to initiate any big positions ahead of the ECB meeting on Thursday and the non-farm payrolls report on Friday. Manufacturing ISM and construction spending were the only U.S. economic reports released this morning and unfortunately both surprised to the downside. Manufacturing activity contracted slightly more in August than in July. The index dropped to 49.6 from 49.8 – the market was looking for a rise to 50. New orders and employment both declined which is consistent with the Beige Book report that found demand in manufacturing weakening over the past 6 weeks. While the ISM number is interesting, the agency’s report on service sector activity is more important. This month’s non-farm payrolls report carries particular significance because it could be the metric that decides whether the Federal Reserves eases on September 13th. On Thursday, we’ll gain greater insight into which direction the non-farm payrolls could move vis a vis the ADP and Challenger reports. Meanwhile construction spending also fell 0.9 percent in July after rising 0.4 percent the prior month. Lackluster housing market activity has constrained new developments. These 2 reports give the Fed a stronger case to ease next week.

However between now and non-farm payrolls on Friday, the market’s main focus will be the upcoming European Central Bank monetary policy meeting. Rumors of progress in the Eurozone continue to swirl, giving investors hope that the central bank will announce new measures to lower peripheral yields and support the region’s economy. Yet the EUR/USD is trading slightly lower this morning because traders realize that during the debt crisis, European policymakers have had a track record of disappointment. While recent developments in Spain including Catalonia’s bailout request and capital injection into Bankia increases the urgency and pressure on the ECB to act, it remains to be seen whether their announcements on Thursday will contain enough details to satisfy euro bulls. With banks across Wall Street calling for a full sovereign bailout of Spain, there’s no question that the ECB needs to act swiftly and decisively – hopefully they realize this as well.

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