EUR/USD, Dow Await the Fed's Beige Book to Gauge Rate Cut Risks

Pending Home Sales (MoM) (JUL) (10:00 EST; 14:00 GMT)
Fed?s Beige Book (AUG) (14:00 EST; 18:00 GMT)

Expected: -2.0%

Previous: 5.0%

How Will The Markets React?
On Wednesday, the US will get the last piece of July housing data when the National Association of Realtors? pending home sales report will be released. The figure is estimated to fall 2.0 percent from June after surging 5.0 percent during the period prior, and given the broadly negative data we?ve seen regarding the housing sector, a lower reading will not be entirely surprising. In fact, the annualized rates of growth for this index are dismal as well: pending home sales in June were down a whopping 8.6 percent from last year. Nevertheless, the Federal Reserve Beige Book report, which will be released at 14:00 EST, will likely garner the most attention on Wednesday. As a summary of economic conditions throughout each of the 12 Fed districts, the report could give key insight into how the FOMC will vote on September 18th. Some of the key factors to watch will be employment, consumption, and inflation data, especially as the Fed Chairman said last Fridaythat he would be paying attention to the “timeliest” indicators since past months? data had been less useful than usual. Furthermore, traders will be looking at the commentary regarding the labor market ahead of Friday?s NFP report - a known market mover.
For more on the Fed?s next rate decision, along with the possible outcomes of four central bank meetings this week, click here.
Bonds - 10-Year Treasury Note Futures
The back and forth price action of the past several sessions in 10-year Treasury note futures appears to be developing into another bullish continuation pattern, especially since price was able to hold above the prior range highs on a closing basis at 108-29. That leaves the pattern of higher highs and higher lows intact on the daily chart with the contract likely to target 110-00. The release of US housing data and the Fed?s Beige Book report may only help the case for further Treasury gains, especially if the news supports the case for a rate cut by the Federal Reserve in September.
10-Year Treasury Note Futures (Daily Chart)

Despite volatile price action on Friday, the EURUSD pair remains range bound, as mixed risk averse sentiment keeps US dollar traders on edge. Outside of the 1.3565 - 1.3685 range, the next level of resistance sits at the 78.6% fib at 1.3750, which could be the pair?s next bullish target. However, EURUSD faces massive event risk on Wednesday and the pair?s reaction may sound counterintuitive, as signs that the Federal Reserve will cut rates in September could send EURUSD higher as the US dollar has traded more as a safe-haven asset over the past few weeks and the data would help to assuage credit crunch concerns. Furthermore, the prospect of lower interest rates would limit the dollar?s attractiveness in terms of carry trade differentials. On the other hand, if the Fed?s Beige Book report signals that the economy may be able to weather the housing slowdown, equity markets could unravel as risk averse sentiment returns as rate cut probabilities get slashed, which could push EURUSD down towards support at 1.3565, with sharp declines taking on 1.3485.
[B]EUR/USD (Daily Chart)

Equities - Dow Jones Industrial Average
The Dow Jones Industrial Average continues to make its way higher after breaking above a descending trendline on Friday, with the index ending Tuesday up 0.76 percent at 13,458.62. This trendline had blocked gains for the equity index since late July, and the Dow?s move above this level signals that price could be moving higher to complete a 78.6 percent retracement of the decline from the August 17th high at 13,700, and remains possible as long as credit jitters subside. US equities face event risk from Wednesday?s pending home sales data and the Fed?s Beige Book report. However, the Beige Book will likely be the greatest market mover as it will provide clues as to what the central bank?s next move will be. If traders get the sense that the Fed will cut rates in September, the Dow will almost certainly rally. On the other hand, if the report indicates that economic conditions remain relatively resilient, the equity index could fall back towards 13,200.
[B]Dow Jones Industrial Average (Daily Chart)


Written by Terri Belkas, Currency Analyst of