What Are The Markets Facing?

The ongoing housing recession, mounting job losses, and indications of slowing consumer spending leads many to believe that the US economy is in the midst of a real economic recession, and the upcoming GDP report will go a long way to dispel or confirm such pessimistic sentiment at 8:30 EDT. However, the median consensus forecast calls for the advanced Q2 GDP figure to actually jump 2.3 percent after rising 1 percent in Q1. There is a huge range when it comes to these forecasts, as the lowest estimate comes in at 0.9 percent while the highest comes in at a whopping 4.2 percent, and traders should note that not one of the 79 economists polled by Bloomberg News predicts a negative GDP release. Given this clear bias for an optimistic reading, a weaker-than-expected result is likely to have the greatest impact on US assets, especially if GDP does show a surprise contraction. On the other hand, a strong GDP reading in line with or above expectations should lead to gains for the greenback, Treasury yields, and the DJIA.

Bonds – 10-Year Treasury Note Futures

Treasuries have been confined to a range over the past week or so as the contract consolidates below resistance at 114-14. However, upcoming US data could lead Treasuries to break out as Q2 GDP will be released. This is the advanced reading, so it is likely to be revised later on, but the news will nevertheless be a market-mover. If GDP proves to be disappointing and misses expectations of 2.3 percent by a large margin, Treasuries could surge toward trendline resistance and the 100 SMA near 115-22. On the other hand, if GDP rises in line with or more than expectations, the contract could pull back sharply toward the bottom of the recent range near 113-00.

FX – EUR/USD

From a long-term perspective, EUR/USD continues to trade within a wide range of 1.5365 – 1.6000, as the US dollar consolidates across the majors. Since we’ve already had a test of 1.60 and a break below the 100 SMA at 1.5665, the next logical move is toward the multi-month lows at 1.5365. However, a break below near-term support at 1.5550 will be required first. Looking ahead to Thursday, Euro-zone CPI is expected to rise 4.1 percent in June from a year earlier, which could lead EUR/USD higher during the European trading session. However, at 8:30 EDT, US GDP will hit the wires and is anticipated to have jumped 2.3 percent in Q2. If the data is as strong as, or better than expectations, a US dollar rally could pull EUR/USD down toward 1.55. On the other hand, if GDP disappoints the markets, US dollar weakness could return and push EUR/USD up toward 1.5650 once again.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average managed to rally once again on Wednesday and even broke above former resistance at 11,500. However, traders should keep an eye on financial market news, as indications of distress amongst financial institutions could trigger widespread sell-offs in the global equity markets (and for that matter, forex carry trades). Looking ahead to Thursday, US Q2 GDP data could shake up the markets a bit, with better-than-expected readings likely to help the DJIA continue rallying above near-term resistance at 11,634 toward the 50 SMA at 11,837. On the other hand, disappointing news will only add to recession fears, which could lead the index to fall back below 11,500.

Terri Belkas is a Currency Strategist at FXCM.