EUR/USD: Trading the Change in U.S. Pending Home Sales

Trading the News: U.S. Pending Home Sales

Why Is This Event Important:

The downward revision in the 2Q GDP reading suggests that economic recovery is losing steam as the effects of the fiscal stimulus tapers off, and the Federal Reserve may see scope to loosen monetary policy further over the coming months in order to stem the downside risks for growth and inflation.

What’s Expected:

Time of release:09/02/2010 14:00 GMT, 10:00 EST

Primary Pair Impact :EURUSD

Expected: -1.0%

Previous: -2.6%

Will This Be Market Moving (Scenarios):

Pending home sales in the world’s largest economy is forecasted to fall another 1.0% in July following the unexpected 2.6% drop in the previous month, and the housing market may deteriorate further over the coming months as households face the ongoing weakness in the labor market paired with tightening credit conditions. However, as the European Central Bank is scheduled to announce its rate decision ahead of the slew of U.S. event risks, the EUR/USD could face choppy price action on Wednesday, which would make trading the news increasingly difficult.

The Upside

A report by the Commerce Department showed personal spending in the U.S. advanced 0.4% in July, with income growth adding 0.2% during the same period after holding flat during the previous month, and households may show an increased willingness to purchase homes as the Fed holds borrowing costs close to zero. Accordingly, a better-than-expected print would encourage an improved outlook for future growth as private consumption remains one of the leading drivers of growth, which could lead the U.S. dollar to retrace the sharp decline on Wednesday.

The Downside

However, the record drop in existing home sales paired with the unexpected decline in new home purchases reflects the ongoing weakness within the housing market, and the recent developments suggest that there could be a larger-than-expect drop in pending sales as policy makers continue to see a substantial amount of slack within the real economy. As a result, a dismal sales report could lead the Fed to maintain a cautious tone throughout the remainder of the year, and Chairman Ben Bernanke may look to support the private sector going into 2011 in an effort to foster a sustainable recovery.

How To Trade This Event Risk

Expectations for a drop in pending home sales certainly reinforces a dour outlook for the greenback but nevertheless, an enhanced housing report could spark a bullish reaction in the reserve currency, which could set the stage for a long dollar trade. Therefore, if demands slip less than 0.5% or unexpectedly rise from the previous month, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

On the other hand, tightening credit conditions paired with the weakness in the labor market is likely to weigh on the housing market, and a drop in pending sales could drag on the exchange rate as the economic outlook deteriorates. As a result, if sales contracts 1.0% or greater from the previous month, we will favor a bearish outlook for the greenback, and will utilize the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

Impact that U.S. Pending Home Sales has had on USD during the last month

June 2010 U.S. Pending Home Sales

Pending home sales in the world’s largest economy unexpectedly slipped 2.6% in June after contracting a record breaking 29.9% in the previous month, while a separate report showed personal incomes and spending held flat during the same period, and the data reinforces a dour outlook for future growth as the private sector remains weak. As the fiscal stimulus tapers off, with households continuing to face tightening credit conditions, the housing market may continue to deteriorate further over the coming months, which could bear down on the recovery. As a result, the Fed held a cautious outlook for the economy and said “notable restraints on the recovery persists” given the high rate of unemployment, and the central bank is likely to maintain the expansion in monetary policy over the coming months in an effort to mitigate the downside risks for growth and inflation.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com