US Pending Home Sales (NOV) (15:00 GMT; 10:00 EST)
Expected: -0.6%
Previous: 0.6%

What Are The Markets Facing?

After US pending home sales improved for two consecutive months, traders will be keeping an eye on the November report to see if the index will continue to trend higher or if it will fall lower in line with expectations. The latter could certainly be the case, especially as mortgage lending standards tightened throughout the fourth quarter. As a result, the number of Americans entering into contracts to buy previously owned homes during the month could prove to be more disappointing than the expected decline of 0.6 percent. While it is very clear that the housing sector is in a dismal state, this leading indicator of existing home sales activity will only highlight that fact. Meanwhile, we’ve seen that median prices for previously owned homes has dropped 3.3 percent in November from last year, and with demand likely to continue withering and inventories still growing, prices of existing homes, which make up about 85 percent of the US housing market, likely have much further to fall. Nevertheless, with little in the way of major US data available this week and the focus likely to turn to the upcoming Bank of England and European Central Bank rate decisions on Thursday, the US Dollar may show a mild response to the news. Meanwhile, Treasuries and US stock markets may only react to very surprising data.

Bonds – 10-Year Treasury Note Futures

The recent breakout in Treasuries from the bull-flag pattern has neared resistance at 115-15, and with MACD looking bullish and the contract firmly within an ascending channel, it may simply be a matter of time before this level is reached. Indeed, Tuesday’s economic data may only support gains in Treasuries, especially if the news is particularly disappointing and leads the markets to further price in a 50bp cut by the Federal Reserve at the end of the month.

FX – EUR/USD

The Euro rally has backed off in recent days, as 1.4800 provided formidable resistance. The next level of support looms below at the confluence of the 23.6 percent retracement of 1.3360 – 1.4967 and the 50 SMA at 1.4590/1.4620, and with no economic data on hand on Monday, EUR/USD may fall down towards this level. On Tuesday, the release of US pending home sales could prop the pair up slightly, especially if the news is disappointing enough to lead traders to price in a 50bp rate cut by the Federal Reserve more aggressively. Nevertheless, the biggest event risk for the pair looms on Thursday, when ECB President Trichet will speak following the bank’s decision, in which they are anticipated to leave the overnight lending rate at 4.00 percent. Trichet is likely to remain hawkish given widespread indications of relentless inflation pressures, which would be quite bullish for the EUR/USD pair.

Equities – Dow Jones Industrial Average

The daily charts of the Dow Jones Industrial Average look highly bearish, especially after the index plunged through the psychologically important 13,000 level. Furthermore, Friday’s massive drop came amidst a surge in volume, which is very negative for US equities. Where the Dow goes from here will depend primarily on the status of risk aversion in the markets as well as financial market news, but it is worth noting that support looms below at 12,725 and 12,518. However, it may be the most immediate support level (12,800) that will matter most, as sharp drops in the Dow tend to be followed by brief periods of consolidation. With no economic data scheduled for release on Monday, this may be the ideal time for this occur. On Tuesday, though, US pending home sales could weigh on the US equity markets, especially if traders ramp up speculation of a 50bp rate cut on January 30.

Terri Belkas is a Currency Strategist at FXCM.