US Existing Home Sales (JAN) (15:00 GMT; 10:00 EST)
Expected: -1.8% to 4.80M
Previous: -2.2% to 4.89M

What Are The Markets Facing?

On Monday, the National Association of Realtors is expected to report that existing home sales slipped to 4.80 million - the lowest reading since record-keeping began in 1999. Sales of existing homes account for nearly 85 percent of the market, according to NAR, so this particular release serves as a good indicator of the status of the sector as a whole. Traders will also be looking at the inventory component, as signs that supplies continue to build while demand wanes will suggest that prices have much further to fall. This news will not be entirely surprising as the Federal Reserve’s January 30 rate cut was accompanied by a statement that noted “recent information indicates a deepening of the housing contraction.” Still, worse-than-expected readings may only lead the markets to price in another round of sharp rate cuts by the central bank on March 18. However, the vote for the most recent reduction in the fed funds rate had one dissenter, Richard Fisher, who “felt that monetary policy was already quite stimulative” given the emergency 75bp rate cut on January 22 which brought the funds rate down 175 basis points since September. Furthermore, Fisher noted that “headline inflation was too high at more than 3 percent over the last year.” Nevertheless, fed fund futures are still fully pricing in a 50bp cut to 2.50 percent, and as a result, a worse-than-expected existing home sales report could exacerbate market speculation about the bank’s next move as signs continue to suggest that the US economy is in or nearing a recession.

Bonds – 10-Year Treasury Note Futures

Treasuries have continued to rally from Wednesday’s low, and the decisive rejection of support at 115-10 keeps the medium term focus on the upside. Furthermore, with equities starting to show signs of weakness once again, the contract may push towards117-26 once again. Unsurprisingly, upcoming US data will likely work in favor of additional gains in Treasuries, as NAR existing home sales are expected to reflect the dour status of the housing sector. With housing values forecasted to drop further, the news may ramp up speculation that the US is in or nearing a recession.

FX – EUR/USD

Weakness in the US dollar has come back in full force, helping to spur a major EUR/USD rally that most recently tested resistance at 1.4850. However, the markets will be watching trendline resistance at 1.4886, as a break above that level may signal that a breakout will take EUR/USD to at least 1.50. While we need to see Friday’s US session price action resolve itself, Monday’s US economic data may contribute to gains for the pair as NAR existing home sales are forecasted to fall to yet another low. Indeed, there is little doubt that the US housing sector – and the economy at large – is in dire straits. Moreover, signs that property values will only drop further may add to speculation that the Federal Reserve will need to grapple with not only strong inflation pressures and instability in the financial markets, but a recession as well (hence, the recent proliferation of news reports discussing ‘stagflation’). On the other hand, if EUR/USD fails to break above near-term resistance, the US dollar may stand to gain from a pure technical standpoint.

Equities – Dow Jones Industrial Average

Since the Federal Reserve’s emergency 75bp rate cut on January 22, US equities have clawed their way higher. However, a daily chart of the Dow Jones Industrial Average shows price consolidating within a pennant formation, and given the sharp declines that preceded the recent moves, a bearish breakout is likely. While trading during Friday’s US session could change the picture, upcoming economic data on February 25 could weigh on the index. Indeed, with NAR existing home sales forecasted to decline further, the news may only add to recession fears and concerns that banks may have additional writedowns to claim. The next level of support looms around 12,000, but if the Dow manages to find a bid tone and breaks above 12,500, the index will target trendline resistance at 12,660.

Terri Belkas is a Currency Strategist at FXCM.