Dollar slips as US pending home sales hit a record low: leading indicators

The US dollar lost ground on Tuesday as reports of a possible US-Iran compromise swung oil prices and weak US housing data added pressure. investingLive's Americas wrap summed up the session as "USD falls as deal headlines swing oil."

The ECB reference rates for 20 October show a softer dollar against several majors. USD/CHF's fixing fell 0.17% to 0.8236, USD/CAD's fell 0.16% to 1.4051, and NZD/USD's rose 0.13% to 0.5679. The picture was not one-sided: EUR/USD's fixing slipped 0.09% to 1.1215. These are official daily fixings, not live quotes. Our sister site has a fuller round-up in Dollar slips as Iran deal headlines swing oil and US housing data sinks.

What is a leading indicator?

An economic indicator is a regular data release that tells you how part of the economy is doing. Economists sort them into two broad groups.

• A leading indicator tends to change before the wider economy does. It gives an early hint of what is coming.
• A lagging indicator changes after the economy has already turned. It confirms a trend rather than predicting it.

US pending home sales are a classic leading indicator. A home sale is "pending" when a buyer signs a contract but the deal has not closed yet. According to investingLive, the report "provides an early indication of demand in the existing housing market." Building permits work the same way: a permit comes before construction starts.

A worked example

investingLive reports that September pending home sales fell 7.3%, against an expected drop of 0.5%. The prior month was +0.3%. The index fell to 66.0 from 71.2, a record low.

We can check the headline number:

1. Change in the index: 66.0 - 71.2 = -5.2
2. Divide by the starting level: -5.2 / 71.2 = -0.0730
3. As a percentage: about -7.3%

The miss versus forecast was 6.8 percentage points (-7.3 minus -0.5). Sales were also down 12.6% from a year earlier.

The housing starts report from the same day shows why one leading signal is never the whole story. According to investingLive, September housing starts were 1.221 million, down from 1.305 million the month before. That is (1.221 - 1.305) / 1.305 = about -6.4%. But building permits, which lead starts, rose to 1.400 million from 1.275 million. That is (1.400 - 1.275) / 1.275 = about +9.8%. So one forward-looking number fell sharply while another rose.

On the currency side, the USD/CHF fixing moved from 0.8250 to 0.8236: (0.8236 - 0.8250) / 0.8250 = -0.17%. Compared with the 13 October fixing, it is down 1.04%. You can follow the pair on a USD/CHF chart or track the broad dollar on the US Dollar Index chart.

Why it matters for new traders

Markets try to price the future, so leading indicators can move currencies even when they get less attention than big releases like inflation or jobs data. A record low in pending sales hints that later housing figures, such as completed sales, could also be weak.

Keep three points in mind:

• Leading data can be noisy. Monthly figures swing, and Tuesday's permits rose while starts fell.
• Context matters. investingLive's analyst wrote that a further leg lower in housing "could be a real problem for the economy." That is one source's view, not a certainty.
• Several drivers act at once. On the same day, oil headlines tied to Iran also moved the dollar, so it is hard to credit one release with the whole move.

Key terms

• Economic indicator: a regular data release that measures part of the economy.
• Leading indicator: data that tends to turn before the wider economy, such as pending home sales or building permits.
• Lagging indicator: data that confirms a trend after it has started.
• Pending home sale: a signed contract to buy a home that has not yet closed.
• Reference rate (fixing): the ECB's one official exchange rate per business day, not a live price.