EUR/USD: Trading the U.S. New Home Sales Report

Trading the News: U.S. New Home Sales

What’s Expected:

Time of release: 06/23/2011 14:00 GMT, 10:00 EST

Primary Pair Impact:EURUSD

Expected: 310K

Previous: 323K

DailyFX Forecast: 300K to 340K

Why Is This Event Important:

New home sales are projected to increase at an annualized pace of 310K in May after expanding 323K in the previous month, and the slowdown in purchases could foster a bearish reaction in the U.S. dollar as the outlook for future growth deteriorates. As the housing market remains depressed, the Federal Reserve may see scope to retain its zero interest rate policy throughout the remainder of the year, and Chairman Ben Bernanke may retain a dovish tone throughout the second-half of the year as the world’s largest economy faces a slowing recovery. However, as risk sentiment continues to dictate price action in the foreign exchange market, a dismal housing report could bear down on trader sentiment, and the data could stoke demands for the USD as it benefits from safe-haven flows.

Recent Economic Developments

The Upside

The Downside

The ongoing expansion in consumer credit paired with record-low interest rates could generate increased demands for newly built homes, and a rise in purchases may lead the Fed to raise its assessment for the economy as growth prospects improve. However, as household sentiment wanes, the ongoing weakness within the labor market may dampen demands for new homes, and a dismal sales report may lead the Fed to expand monetary policy further as it aims to stem the downside risks for the region. In turn, we are likely to see the central bank keep the benchmark interest rate close to zero throughout 2011, and the committee may show an increased willingness to expand its asset purchases in an effort to stimulate the ailing economy.

Potential Price Targets For The Release

How To Trade This Event Risk

Projections for a slower pace of purchases raises a bearish outlook for the greenback, but an enhanced housing report could set the stage for a long U.S. dollar trade as growth prospects improve. As a result, if new home sales increase from the previous month, we will need to see a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these preconditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate 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 protect our profits.

In contrast, the tepid recovery in the labor market paired with the drop in household confidence dampens the outlook for consumption, and demands for new homes may deteriorate further in the second-half of the year as the Fed maintains a cautious tone for the real economy. Therefore, if purchases weaken to 310K or lower in May, we will implement the same setup for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

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

April 2011 U.S. New Home Sales

Sales of newly built homes in the U.S. increased 7.3% in April to an annualized pace of 323K, and the rise in purchases certainly reinforces an improved outlook for the economy as private sector consumption remains one of the leading drivers of growth. A deeper look at the report showed median home prices increased an annualized 4.6% after declining 4.6% in March, while demands increased across all region, led by a 168K rise in the Southern states. Although we’re seeing a gradual recovery in the housing market, recent comments from the Federal Reserve suggest that the central bank will continue to support the real economy given the ongoing weakness within the labor market. In turn, the FOMC is likely to retain its zero interest rate policy in the second-half of the year, and Fed Chairman Ben Bernanke may preserve a dovish outlook for the region as the economic outlook remains clouded with uncertainties. Indeed, the positive development spurred a rise in risk appetite, with the EUR/USD rallying to a high of 1.4132, but the pair struggled to hold its ground throughout the North American trade as the exchange rate settled at 1.4098 at the end of the day.

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