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

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

2011-09-22 19:26:00
David Song, Currency Strategist
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Trading the News: U.S. New Home Sales

What’s Expected:

Time of release: 09/26/2011 14:00 GMT, 10:00 EST

Primary Pair Impact: EURUSD

Expected: 295K

Previous: 298K

DailyFX Forecast: 275K to 305K

Why Is This Event Important:

New home sales are projected to increase at an annualized pace of 295K in August after expanding 298K in the previous month, and the slowdown in purchases could foster a bearish reaction in the U.S. dollar as growth prospects deteriorate. In turn, the Federal Reserve may keep the door open to conduct another round of quantitative easing, and the central bank may see scope to employ a range of policy tools to stimulate the ailing economy in an effort to stem the risk for a double-dip recession. However, as the Fed carries out ‘Operation Twist’ to flatten the yield curve, the new initiatives should help to foster economic activity, and the committee may endorse a wait-and-see approach throughout the remainder of the year as price growth continues to hold above the 2% target for inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

Existing Home Sales (AUG)

4.75M

5.03M

Building Permits (AUG)

590K

620K

Consumer Credit (JUL)

$6.000B

$11.965B

The Downside

Release

Expected

Actual

Advance Retail Sales (AUG)

0.2%

0.0%

Change in Non-Farm Payrolls (AUG)

68K

0K

Consumer Confidence (AUG)

52.0

44.5

The expansion in consumer credit paired with the rise in building activity may foster increased demands for home purchases, and a positive development could foster a rally in the greenback as the outlook for future growth improves. However, the slowdown in private sector consumption paired with the ongoing weakness in the labor market may weigh on home sales, and a dismal report could spark a sharp reversal in the reserve currency as the region faces an increased risk for a double-dip recession. In turn, we may see the EUR/USD pare the sharp decline from earlier this month, and a near-term correction in the exchange rate may lead the euro-dollar to work its way back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3890-1.3900.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._New_Home_Sales_Report_body_ScreenShot116.png, EUR/USD: Trading the U.S. New Home Sales Report

How To Trade This Event Risk

Easing demands for new homes reinforces a bearish outlook for the greenback, but a positive development could set the stage for a long U.S. dollar trade as growth prospects improve. Therefore, if demands increase from the previous month, we will need to see a red, five-minute candle following the release to generate sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective 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 order to preserve our profits.

On the other hand, the ongoing weakness within the labor market paired with the drop in household confidence may continue to bear down on housing, and a dismal sales report could drag on the greenback as it heightens the risk for a double-dip recession. As a result, if demands weaken to 295K or lower in August, we will carry out the same strategy 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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL 2011

08/23/2011 14:00 GMT

310K

298K

0

+50

July 2011 U.S. New Home Sales

Demands for new homes increased at an annualized pace of 298K in July to mark the slowest pace of growth in five-months, and the ongoing weakness within the housing market may impede on the recovery as Americans face high unemployment paired with fears of a double-dip recession. A deeper look at the report showed demand in the Southern states fell back to 163K from 176K, with sales in the West weakening to 64K from 68K, while purchases in the Northeast increased to 28K from 14K. As private sector activity wanes, the Federal Reserve may take additional steps to stimulate the ailing economy, and the central bank may employ a broad range of policy tools to balance the risk for growth and inflation. The initial reaction in the EUR/USD was short-lived, with the exchange rate pushing back above 1.4400, and the greenback lost ground throughout the day as the pair settled at 1.4440 at the end of the trading session.

EURUSD_Trading_the_U.S._New_Home_Sales_Report_body_ScreenShot115.png, EUR/USD: Trading the U.S. New Home Sales Report

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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