Existing Home Sales (SEP) (14:00 GMT; 10:00 EST)
Expected: 5.25M
Previous: 5.50M

Existing Home Sales (MoM) (SEP) (14:00 GMT; 10:00 EST)
Expected: -4.5%
Previous: -4.3%

How Will The Markets React?

Event risk on Wednesday will be contained to US housing data, and the release may only spark another round of risk aversion trends. The National Association of Realtor’s measure of existing home sales during the month of September is anticipated to have fallen back 4.5 percent to a nearly six-year low of 5.25M. Such a weak figure will not come as much of a shock to the markets, as the dour status of the US housing sector is well known, especially when it comes to the subprime mortgage crisis that has sparked fears of a lingering global liquidity crunch. Nevertheless, news from the sector appears to only be getting worse, especially as mortgage lending standards tightened during the month of August, and home builders are paying heed. The pace of housing starts plunged 10 percent in September to an annual level of 1.19 million, compared to a 1.33 million rate in August. Meanwhile, housing permits – which are considered a sign of builders' confidence in the market – slumped 7 percent to an annual rate of 1.23 million, marking a 12 year low. Clearly, demand for homes has plummeted, and with existing home sales making up 87 percent of the market, Wednesday’s release will serve as a broad barometer for the sector. As a result, a sharp decline in the index in line with or worse than expectations could rattle the equity, forex, and fixed income markets as the figures may spark additional speculation that credit markets and economy still face many road blocks before they can fully recover. Furthermore, with current conditions continuing to deteriorate, the Federal Reserve may be more apt to cut rates by 25 basis points on October 31st.

Bonds – 10-Year Treasury Note Futures

The neutral price action today on Tuesday shows that bulls may not have much steam left, especially as resistance at the September 10th high of 110-31 looms just above. Nevertheless, the Treasury uptrend remains very much intact barring a break below trendline support near 109-27, and the release of weak US housing data on Wednesday may only push the contract up to test the highs once again. On the other hand, strong rallies in the Dow and S&P could weigh Treasuries down.

FX – EUR/USD

The EUR/USD pair has made a solid comeback since plummeting from a record high of 1.4348 down to support at the 1.4140 level, as traders remain broadly bearish on the greenback. The release of NAR existing home sales on Wednesday may only exacerbate that sentiment, as the index is anticipated to have dropped to a nearly six-year low. With existing homes composing approximately 87 percent of the housing market, the figure serves as a broad barometer for the sector as a whole, which could contribute to additional US dollar weakness. While some resistance looms above at 1.4262 (the 61.8 percent retracement level of the decline from 1.4348 – 1.4125), EUR/USD could be primed to take on 1.4300 once again. On the other hand, if existing home sales proves to be somewhat better than expected, or if economic data out of the Euro-zone on the same morning is released at extremely disappointing levels, EUR/USD could pull back below the 1.4250 levels once again.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average staged an end-of-the-day rally on Tuesday after meandering in neutral territory for much of the afternoon. Indeed, with little in the way of immediate resistance and reports that Amazon.com Inc. has quadrupled quarterly profits, the Dow could continue to climb towards Fibonacci resistance at 13,803 (50 percent retracement level) and 13,896 (61.8 percent retracement level). However, the release of NAR existing home sales on Wednesday could crimp gains, especially if the data proves to be more disappointing than expected. Indeed, with the woes of the housing sector persisting as homeowners default on their mortgages or have their properties foreclosed on, it is clear that the credit market mess as not been cleaned up quite yet.

Terri Belkas is a Currency Strategist at FXCM.