A holiday-free calendar and high event risk could lead volatility in the forex markets to pick up next week. The US dollar is likely to encounter disappointing data as ISM non-manufacturing is expected to hit another record low and US non-farm payrolls may indicate that 2008 was solely a year of job losses. Meanwhile, the British pound is anticipated to see a rate cut by the Bank of England, while Euro-zone CPI estimates should tell us whether or not the European Central Bank will do the same on January 15.

Euro-zone CPI Estimate (DEC) - January 6

Eurostat estimates for Euro-zone CPI are projected to show at 5:00 ET that inflation growth eased to a 1.8 percent pace in December from 2.1 percent. Given European Central Bank President Jean-Claude Trichet's more bearish stance on economic growth and the bank's total of 175 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market's speculation that the central bank will cut rates again on January 15, and weigh on the euro. On the other hand, if CPI manages to hold at or above the ECB's 2 percent target, the currency could gain as the markets assume the central bank will not be as quick to reduce rates.

US ISM Non-Manufacturing (DEC) - January 6

Conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to have worsened in December as the Institute for Supply Management index is estimated to fall to another record low of 37.0 from 37.3. Indeed, consumer confidence remains exceptionally weak, as the Conference Board's measure also fell to a record low of 38 during the same month. We already know that the US economy fell into recession in December 2007, but this data will help to gauge how long the recession will drag on for. A weaker-than-expected result could weigh on the US dollar, but the long-term impact should be limited since the Federal Reserve as already cut rates to a all-time low range of 0.0 percent - 0.25 percent and has few additional options from a traditional monetary policy perspective.

Federal Open Market Committee (FOMC) Meeting Minutes (DEC 16) - January 6

The release of the FOMC's meeting minutes at 14:00 ET from December 16, when they slashed rates to a record low target range of 0.0 percent - 0.25 percent, should draw some attention, especially if they highlight the Committee's plans to support the financial markets via measures that sustain the size of the Federal Reserve's balance sheet at a high level. Many have accepted this as an indication that the Fed is pursuing quantitative easing, if it does seem that they will pursue buying longer-term Treasury securities, the US dollar could pull back as this would suggest that interest rates in the US will continue to fall. Discussions about how long the US recession will last could impact the market as well.

Bank of England Rate Decision - January 8

The British pound could finally break below support at 1.4400 this week as Bloomberg News is forecasting that the Bank of England will cut rates by 50 basis points at 7:00 ET on Thursday, while Credit Suisse overnight index swaps are fully pricing in a 25 basis point reduction. This is indeed within the realm of possibilities since the UK has tipped into recession and the BOE, and UK government, anticipate that things will only get worse. In fact, the BOE's latest Credit Conditions Survey for the fourth quarter indicated that they had worsened, with availability of loans down despite unexpectedly stable demand for mortgages. Furthermore, the survey said that spreads on secured lending to households and on corporate lending had widened, and that defaults on household and non-financial business loans had increased. Overall, this leaves the odds in favor of year another rate cut by the BOE on January 8, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee's subsequent statement.

Canadian and US Unemployment Reports - January 9

There will be two unemployment rate releases to watch on Friday that could have a big impact on the currency markets, one from Canada and one from the US. At 7:00 ET, the Canadian net employment change is forecasted to have fallen by 22,000 during December while the unemployment rate is anticipated to have risen to a nearly three-year high of 6.5 percent from 6.3 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

At 8:30 ET, US non-farm payrolls (NFP's) will hit the wires and are forecasted to fall for the twelfth straight month in December at a rate of -493,000. Something that is garnering even more attention though is the rise in the unemployment rate, which is predicted to match the June 1993 high of 7.0 percent from 6.7 percent. Results in line with expectations would suggest that consumption will continue to wane through the first half of 2009, and could weigh on the greenback.