Will EUR/USD Target New Highs Or Take A Dive On Tuesday's US Data?
Consumer Confidence (SEP) (10:00 EST; 14:00 GMT)
Existing Home Sales (AUG) (10:00 EST; 14:00 GMT)
How Will The Markets React?
As if US economic data hasn't been bad enough, the release of consumer confidence and housing figures on Tuesday may only exacerbate the dour sentiment regarding the chances of a recession in the country. The Conference Board's consumer confidence survey is expected to fall to a 13-month low of 104.2 in September amidst volatility in the financial markets and record high oil prices. Such a decline won't be entirely surprising, as the sentiment index has slowly edged down throughout the year as consumer become increasingly pessimistic about job prospects and spending plans. The other lynchpin of gloomy confidence reports: pronounced weakness in the housing sector. This point will be highlighted on Tuesday as well when the National Association of Realtors' existing home sales are estimated to plummet to a five-year low of 5.49 million, as demand quickly dissipates. With sellers of previously owned homes unable to offer the incentives that contractors can give on new homes, this sales report is likely to be particularly hard-hit. Furthermore, according the NAR, sales of previously owned homes traditionally account for roughly 85 percent of the market. As a result, traders will look to the median price component for a gauge on how home values are faring nationally. Thus far, it isn't looking good as median price growth has slowed quite a bit and was actually down 0.6 percent from a year ago during the month of July. Overall, the data due to be released on Tuesday may only add to weakness in the US Dollar, and if the figures are bad enough, the news could pull the Dow and S&P 500 lower as well.
Bonds - 10-Year Treasury Note Futures
Treasury note futures made an attempt to get up through the 109-00 level today, but failed to break that barrier and ended Monday at 108-29. However, according to IFR: 'Sentiment readings are beginning to switch to a friendlier view for treasuries in the options market and that could be a fairly good signal that the contract can retrace some of the recent losses.' With trendline resistance looming above, 109-13 may be the next target for Treasuries. US event risk on Tuesday could accelerate any gains as consumer confidence and NAR existing home sales are both anticipated to disappoint.
The US Dollar remains remarkably weak and has pushed EUR/USD to test record highs, as the Federal Reserve unexpectedly cut the fed funds rate and discount rate by 50bps each. Disappointing economic data has helped the case for the currency either, as labor market and inflation reports all proved to be softer-than-expected. Event risk due out of the US on Tuesday could continue to weigh on the greenback, as both consumer confidence and NAR existing home sales are estimated to drop. If the figures drop more than expected, this could prove to be especially gloomy for the US Dollar, as EUR/USD would target the Monday's record high of 1.4129, and perhaps a fresh high of 1.4150. However, if consumer confidence proves to be surprisingly positive, traders may gauge the resilient sentiment as a positive bellwether for consumer spending - which many fear will take a sharp hit in coming months - and send EUR/USD down to test 1.3980.
Another trigger to send EUR/USD plummeting that traders should keep in mind is if we see news of a US company in distress as a result of either subprime mortgage losses or credit troubles in general. Such news would take a large toll on US equity markets, and the return to risk aversion could send the greenback rocketing higher as investors flock towards safe-haven assets.
Equities - Dow Jones Industrial Average
The Federal Reserve's unexpected 50bp cut to the fed funds and discount rates set the stage for massive rally in US equities. In fact, with the Dow Jones Industrial Average now well above former resistance at 13,700, the index could be targeting the July highs above the 14,000 level. However, it is worth questioning how realistic it is to expect the Fed's policy actions last week to fix the credit crunch that the US is facing, especially as both supply and demand for credit wanes. As a result, traders may stop riding the wave of optimism that the Fed initiated last week and instead focus on the status of the economy. If both consumer confidence and NAR existing home sales worsen more than expected, the Dow could fall towards support at the former resistance level of 13,700. On the other hand, if sentiment remains resilient and home sales drop less-than-expected, the equity index could hold aloft and continue its trek towards 14,000.