This week, investors will look to nonfarm payroll data. With so much being tied into the U.S. employment situation, the level of job growth reported could determine whether monetary tightening in September is more or less appropriate.
Also, this week, the Bank of England and European Central Bank will hold meetings, and along with the U.S. jobs report, will prompt heavy trading volume as central banks have played such an important role in influencing the directions of markets this year that keeping an eye on currency markets is essential.
The first chart below is of PowerShares DB US Dollar Index Bullish over CurrencyShares Euro Trust .
According to a Reuters survey asking when the Fed will tighten easing measures, more than half of the economists polled stated September.
Fed officials restated last week that policy continues to be tied to data more so than to a specific timetable. When Federal Reserve Chairman Ben Bernanke gave a detailed timeline at the Fed's meeting in June, markets began discounting tighter policy that was years down the road.
Although markets may have overshot, the general trend of world economies is still on a steady path. As the Fed considers slowing down its bond purchases, the ECB aims to lower youth unemployment in Europe and enact policy that accommodates gradual economic growth.
The divergent nature of the central banks' policies should lead to a stronger dollar and weakening euro. The pair below looks to trend higher and eventually break through its upper resistance line in coming months.
The next chart is of iShares Barclays 1-3 Year Treasury Bond over iShares Barclays 20+ Year Treasury Bond . The pair is a measure of the Treasury yield curve. As the price moves higher, the curve steepens as short-term rates fall faster than long-term rates.
The curve spiked higher as speculators sold long-term Treasuries out of fear the Fed would slow quantitative easing. Bernanke's comments in June sent the curve spiraling even higher.
Rates overshot, as inflation and growth remain tepid, which should allow for a correction. Fixed-income products should increase in demand as investors realize that they have discounted rates too far into the future.
In the chart below, the curve has already begun to fall back toward its trend line. If nonfarm payroll numbers disappoint this week, look for this pair to fall more and the curve to flatten considerably.
The last chart is of Guggenheim S&P 500 Equal Weight over SPDR S&P 500 . This pair represents market breadth in the S&P 500, the level of participation during equity index moves. As the pair rises, it signals that a majority of the stocks in the index are moving higher as well.
U.S. equities remain the most attractive stocks in the world , which means that if equity markets as an asset class move higher, this pair should lead the way.
Volatility has been introduced to markets these past few weeks as questions over monetary policy all over the world have arisen. Investors sold off higher risk assets such as equities due to this uncertainty.
Although equity markets did drop from their highs, the market was vastly overbought. Analysts had been calling for a downturn the past three months. With such fragility, any news was sure to incite a selloff.
So the markets have merely corrected from oversold levels. Our economic picture has hardly changed, and if the Fed really is set on changing policy depending on the economy, then we should not see tightening until markets can truly sustain themselves.
At the time of publication the author had no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.