Durable Goods Orders (JUL) (08:30 ET; 12:30 GMT)
Expected: 1.0%
Previous: 1.3%

New Home Sales (MoM) (JUL) (10:00 ET; 14:00 GMT)
Expected: -1.7%
Previous: -6.6%

How Will The Markets React?

The US economic calendar has been remarkably thin this week, leaving the fixed income, forex, and equity markets to trade off of news (or the lack of it) regarding the liquidity crunch. However, things could change on Friday when durable goods orders and new home sales will both be released. Durable goods will hit the wires first, and the figure is anticipated to show that manufacturers continue to ramp up output after working off excess inventories built up late last year. Growth in industrial production, fueled by rising exports and increased business spending, may be one of the only major drivers of overall expansion in the economy during the second half of the year. However, the most recent leading indicators report showed that orders for non-defense capital goods fell back, boding ill for Friday's durable goods report and business investment as a whole. Later in the morning, new home sales are anticipated to drop 1.7 percent from June to a 10-year low of 820,000 units. Dour news for the housing sector isn’t likely to come as a surprise to anyone, but if investor sentiment takes a hit on Friday morning (more subprime-related job losses, very disappointing durable goods orders, etc), the housing data may only contribute to that pessimism. Finally, traders should watch out for speeches by the Federal Reserve’s Fisher, Lockhart, and Poole at 14:45 EST, as any commentary regarding recent financial market conditions or inflation will not be ignored.

Bonds – 10-Year Treasury Note Futures

The latest leg higher in 10-year Treasury note futures was accompanied by a decline in open interest, signaling that the move had more to do with short covering rather than a shift in sentiment. If that is indeed the case, the recent highs at 109-095 will likely be the high for the near term, as this also marks March’s high (109-09). However, all of this is contingent upon risk aversion throughout the markets. Friday’s US economic data may not create much volatility for bonds, unless a jump in durable goods is strong enough to lead traders to stop pricing in rate cuts for the September 18th FOMC meeting. Such a move could push Treasuries towards the 108-00 level.

FX – EUR/USD

Following the recent surge in volatility, EUR/USD has consolidated tightly between 1.3450 – 1.3540, as price action has died down significantly. Furthermore, with economic data out of the US very thin this week until Friday, many of the other USD pairs remain contained to similar ranges. Looking at Friday’s event risk, a strong durable goods orders report could reignite the greenback and take EUR/USD down for a test of support at 1.3400/50. On the other hand, a disappointing durable goods figure could propel the pair through Fibonacci resistance to take on 1.3700, as new home sales may only exacerbate any negative sentiment on the US dollar. All of this price action may only occur during a short time frame, however, as the overarching theme of the US markets remains on the liquidity crunch and risk aversion. While the focus on these issues appears to have died down somewhat, they are highly unlikely to fade. As a result, a return to volatile conditions should work in favor of the greenback in coming weeks.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average continues to make gains as volatility dies down, with the equity index ending Wednesday up 1.11 percent at 13,236.13. Given the Dow’s bounce from support at the 200 SMA, price could be targeting the 61.8% retracement level of the decline from 14,021.95 at 13,441.00. Furthermore, while US equities face event risk from Friday’s economic data scheduled to be released, price action in the Dow will likely remain contingent upon volatility and risk aversion trends related to concerns about the liquidity crunch. Nevertheless, a solid durable goods report could help ignite a bid tone for US equities on Friday morning, as the data would provide some hope that the US economy can weather the storm with the help of business investment. On the other hand, a disappointing reading combined with a round of weak new home sales later in the morning could quell market optimism.

Terri Belkas is a Currency Strategist at FXCM.