A Greater Than Expected Drop in U.S. Existing Home Sales Report May Validate Recent EURUSD Short Position

Fundamental Outlook

Existing home sales are forecasted to decline 13.4 percent in July after falling for two straight months. The projected decrease in home sales is largely due to the continuing effects of the conclusion in the homebuyer’s tax credit. If expectations are indeed correct, the drop in the sales figures will mark the largest decline since December 2009. Going forward, as the supply in the housing market continues to outpace demand, prices will likely continue their southern journey, with the effects lurking into the 2011. Also weighing on existing home sales is uncertainty in the labor market. As of late, nonfarm payrolls plunged 131K in July after falling a revised 221K the previous month, while initial jobless claims rose to its highest level since November as companies step up firing amid uncertainty in the economic outlook. At the same time, credit conditions remain tight and are likely to remain at their tense levels, while impeding on the Fed’s stimulus efforts. All in all, with slack in the real economy weighing on the recovery from the world’s largest economy, a reading greater than the expected drop in existing home sales may stir increased volatility in the markets, leading traders to seek safety. In turn, this move will validate my short EURUSD position from 1.3100.

Technical Outlook

EUR/USD

Source: FXCM’s Strategy Trader- prepared by Michael Wright

EUR/USD: After breaking below the narrow range at 1.3200, the pair has recently slipped below the broader range, and price action now eyes 1.2500. Indeed, I have been short the pair since 1.3100 and will maintain my position over the upcoming days.

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Written by Michael Wright, Currency Analyst

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