Forex Fundamental Analysis 27 September 2007

Will The EUR/USD Rally Be Reignited By US GDP, Housing Data?

GDP Annualized (2Q F) (08:30 EST; 12:30 GMT)
Expected: 3.8%
Previous: 4.0%

New Home Sales (AUG) (10:00 EST; 14:00 GMT)
Expected: 825K
Previous: 870K


How Will The Markets React?

Traders may face yet another round of negative US economic data on Thursday, but with equity markets keeping their eyes on the prize of another possible rate cut by the Federal Reserve in October, forex traders may be the only ones paying heed to the news. First, annualized GDP for the second quarter is anticipated to be revised down to 3.8 percent from initial estimates of 4.0 percent. Nevertheless, even 3.8 percent marks a strong pace compared to the tepid 0.6 percent growth experienced in the first quarter. Furthermore, this indicator clearly looks back at the economy's performance rather than looking ahead, which may limit its impact on the markets (barring a significantly worse-than-expected revision). One of the other factors that traders will be looking at is personal consumption for the same quarter, which is estimated to be confirmed at 1.4 percent. Nevertheless, this still represents the weakest rate since Q4 2005 and a sharp slowdown from the 3.7 percent pace we saw in the first quarter. With consumer confidence dwindling and the housing recession deepening, concerns have been brewing that spending will slowdown even further and serve to damage the already-fragile economy in coming quarters. Later in the morning, the release of new home sales may exacerbate this sentiment, as the Commerce Department's index is estimated to plummet 5.2 percent to a nearly 10-year low of 825K. With borrowing costs remaining elevated (mortgage rates have actually risen since the Fed cut last week) and stricter lending regulations are making it more difficult to qualify for loans, the number of unsold properties on the market are rising quickly and pulling prices lower.


Bonds - 10-Year Treasury Note Futures

Intraday chart on 10-year Treasury Note Futures show a descending trendline at 109-05 that continues to hold as resistance, as the contract spiked up for a test yesterday and has been keeping below that level throughout Wednesday. Thursday's economic data presents event risk for the contract, as worse-than-expected may lead to ramped up speculation of a rate cut by the Fed in October and could spark a brief bid tone, with a break of 109-05 targeting 109-15.



FX - EUR/USD

The US Dollar remains remarkably weak and has pushed EUR/USD to reach record 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 Thursday could continue to weigh on the greenback, as new home sales are expected to drop and Q2 GDP is anticipated to be revised lower. If the figures are worse than expected, this could prove to be especially gloomy for the US Dollar, as EUR/USD would target a break above 1.4165 to fresh highs near 1.4210. However, if the GDP revision proves to be surprisingly positive, traders may judge that the economy may be able to weather the stormy conditions of the housing recession, which could help 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 the US GDP revision or new home sales worsen more than expected, the Dow could break below 13,700. On the other hand, if the data is actually somewhat optimistic or simply in line with expectations, the equity index could hold aloft and continue its trek towards 14,000.

By: DailyFX




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