MAY 16 US Building Permits (APR) (12:30 GMT; 8:30 EDT)
Expected: 915K
Previous: 927K

U of Michigan Confidence (MAY P) (14:00 GMT; 10:00 EDT)
Expected: 62.0
Previous: 62.6

What Are The Markets Facing?

While Friday’s US economic releases don’t tend to be incredibly market-moving, there are few other indicators scheduled to hit the wires and as a result, the markets could show very muted price action all day or these figures could spark a bit of volatility. First, applications for residential building permits are forecasted to fall to a 17-year low of 915K, as the supply of homes far outstrips that of demand. While it will come as no surprise to anyone that the collapse of the housing sector has yet to bottom out, a surprisingly weak figure could add to bearish arguments for the US economic outlook. Later in the morning, the Reuters/University of Michigan consumer confidence index is anticipated to slip further to a more than 26-year low of 62.0 from 62.6. Indeed, plummeting home values, rocketing food and energy prices combined with persistently tight credit conditions have sparked widespread pessimism throughout the markets. Furthermore, the labor markets have started to deteriorate, as the unemployment rate has slowly ticked higher in recent months and things are only expected to get worse. As a result, more gloomy sentiment does not bode well for consumption trends, and with recent manufacturing data – including industrial production and the regional Federal Reserve surveys – reflecting contraction in the sector, the news may prove to be especially negative for economic growth prospects in the second quarter. On the other hand, it’ll be worth watching the University of Michigan survey to see if the disbursement of the much-touted economic stimulus checks has any sort of positive impact on the index.

Bonds – 10-Year Treasury Note Futures

A daily chart of Treasuries shows the contract holding within a range of approximately 114 - 116, though the contract did show a significant jump on Thursday amidst weak US data. Indeed, Treasuries have been showing a much stronger response to US economic news, whereas the US dollar has generally brushed it off in recent days. Looking ahead to Friday’s data, another wave of disappointing data could push Treasuries up toward the top of its range, with additional resistance looming at the 100 SMA at 116-22.

FX – EUR/USD

The EUR/USD decline from the record highs just above 1.60 has bounced from the 38.2 percent fib of 1.4437 – 1.6018 at 1.5400/15, and while immediate resistance looms at 1.5555, there are signs the pair will climb higher. First, looking at the most recent COT report, the bearish extreme in the euro has been realized as the 52 and 13 weeks indexes are at 2 and 8 after holding at 0 last week, which has bullish implication for EUR/USD. Furthermore, according to Technical Strategist Jamie Saettele’s Daily Technical Report, “The decline from 1.6018 began as an impulse but has failed to continue as one. This does not necessarily mean that the EURUSD uptrend will resume (although it could) but it does mean that at least a sizeable bounce is due…To the classical chartist, price is forming a clear inverse head and shoulders pattern which would be confirmed on a break through 1.5570.” Upcoming economic data out of the US provides only mild event risk for EUR/USD, as building permits and the University of Michigan consumer confidence survey only tend to be market-moving when the data strays far away from expectations. However, there is some upside risk for the latter report, as the disbursement of economic stimulus checks could lead consumer sentiment to improve. On the other hand, rocketing gasoline prices could offset all of that to push the survey reading lower.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average continues to consolidate within a rising wedge, and rallied on Thursday for a test of the 200 SMA and the psychologically important 13,000 mark. However, the recent move came amidst lower volumes, suggesting the gains may be short lived. Indeed, where the DJIA goes from here will have major implications for many markets – including other stock markets and forex carry trades – but it may be determined more upon shifts in risk appetite rather than economic data. As a result, traders should keep an eye on any news from the financial sector or regarding the credit markets that may trigger a return to risk aversion, as this could weigh heavily on the DJIA.

Terri Belkas is a Currency Strategist at FXCM.