EUR/USD Could Break Above 1.4150 If US Durable Goods Order Disappoint
Durable Goods Orders (AUG) (08:30 EST; 12:30 GMT)
Previous: 6.0% (R+)
Durables Ex Transport (AUG) (08:30 EST; 12:30 GMT)
Previous: 3.8% (R+)
How Will The Markets React?
As if US economic data hasn't been bad enough, the release of Durable Goods Orders on Wednesday may only exacerbate the dour sentiment regarding the chances of a recession in the country. The headline figure is anticipated to show a marked slowdown during the month of August, with aviation likely to lead the way as Boeing orders dropped to 75 after showing strong orders of 149 the month prior. Meanwhile, the most recent leading indicators report showed that orders for non-defense capital goods fell back, boding ill for the durable goods report and business investment as a whole. This news could prove to be particularly negative for US markets, as growth in industrial production - fueled by rising exports and increased business spending - may be one of the only major drivers of overall expansion in the economy during the second half of the year. Furthermore, with consumer confidence dropping far more than anticipated, it is likely that household spending growth will slow dramatically and create a drag on the economy. 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 broke through the 109-00 level today to test trendline resistance at 109-13, but failed to break that barrier and ended Tuesday at 109-00. As a result, the picture for Treasuries continues to look bearish, but US event risk on Wednesday could spark gains as durable goods orders are anticipated to disappoint. If we see the contract push above trendline resistance (now at 109-08), Treasuries could target the 110-00 level. However, if durable goods prove to be better-than-expected, gains in the equity markets could lead Treasuries lower.
FX - EUR/USD
The US Dollar remains remarkably weak and has pushed EUR/USD to test record highs after the Federal Reserve unexpectedly cut the fed funds rate and discount rate by 50bps each last week. Disappointing economic data hasn't helped the case for the currency either, as labor market, consumer confidence, 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 durable goods orders 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 a break above 1.4154 to fresh highs near 1.4210. However, if durable goods proves to be surprisingly positive, traders may gauge the resilient sentiment as a positive bellwether for not only business investment, but consumer spending as well - which many fear will take a sharp hit in coming months - and send EUR/USD down to test 1.4030.
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 last week, and with the Dow Jones Industrial Average above former resistance (now support) at 13,700, the index could be targeting the July highs of 14,021. 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 durable goods orders worsen more than expected, the Dow could break below 13,700. On the other hand, if orders actually drop less-than-expected, the equity index could hold aloft and continue its trek towards 14,000.