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

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Trading the News: U.S. Pending Home Sales

Why Is This Event Important:

As market participants anticipate pending home sales in the world’s largest economy to increase for the second consecutive month in November, the data is likely to encourage an improved outlook for future growth as the recovery gradually gathers pace. However, trading the given event risk will certainly be challengingas market liquidity thins ahead of the New Year, and the major currencies could face choppy price action following the release as participation in the financial market remains relatively low.

What’s Expected:

Time of release:12/30/2010 15:00 GMT, 10:00 EST

Primary Pair Impact :EURUSD

Expected: 0.8%

Previous: 10.4%

Will This Be Market Moving (Scenarios):

Pending sales of existing homes in the U.S. are forecasted to increase another 0.8% in November following the record 10.4% expansion in the previous month, and conditions are likely to improve further as the Fed embarks on additional quantitative easing to stem the downside risks for growth and inflation. In turn, the extraordinary efforts should help to support the depressed housing market, and the recent developments could lead the central bank to hold an improved outlook for the region as the rebound in private sector activity picks up steam.

The Upside

The recent upturn in consumer credit paired with the rebound in existing and new home sales suggests that the housing market may have bottomed out in 2010, and low borrowing costs may encourage potential home buyers to take advantage of the downturn in property prices as the government continues to support the real economy. A marked expansion in pending home sales could spark a bullish reaction in the U.S. dollar as the outlook for future growth improves, and the EUR/USD may continue to pare the advance from earlier this month as the economic recovery in the U.S. outpaces the expansion in the euro-area.

The Downside

However, as households face tightening credit standards paired with the ongoing weakness within the labor market, the substantial margin of slack within the private sector could dampen demands for home purchases, and a dismal housing report could bear down on the exchange rate as investors weigh the prospects for a sustainable recovery. A weaker-than-expect home sales survey could instill a bearish outlook for the greenback as investors speculate the Fed to conduct additional monetary easing over the following year, and the data could ignite a sharp rally in the EUR/USD as the outlook for future growth falters.

How To Trade This Event Risk

Expectations for a second consecutive rise in pending home sales certainly reinforces a bullish outlook for the greenback, and price action following the release could set the stage for a long U.S. dollar trade as the prospects for future growth improves. Therefore, if contracts for home sales increase 0.8% or greater in November, we will need to see a red, five-minute candle following the data to establish a 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 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 lock-in our profits.

In contrast, the ongoing weakness in the labor market paired with the substantial margin of slack within the private sector may continue to bear down on the housing market, and a dismal sales report could drag on the exchange rate as the Fed casts doubts for a sustainable recovery. As a result, if pending home sales increase less than 0.2% or unexpectedly contracts from the previous month, we will implement the same strategy for a long euro-dollar trade as the short position mentioned 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

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Oct 2010	12/02/2010 15:00 GMT	-1.0%	10.4%	+22	+62

October 2010 U.S. Pending Home Sales

Pending sales of existing homes in the U.S. surged 10.4% in October to mark the biggest advance since the series began in 2001, and conditions are likely to improve going forward as the economic recovery gradually gathers pace. The breakdown of the report showed pending sales in the Midwest jumped 27.3% to lead the advance, with demands in the Northeast advancing 19.6%, while contracts to buy existing homes in the West slid 0.4% after advancing 3.6% in September. As the Federal Reserve maintains the marked expansion in monetary policy, the extraordinary efforts should help to stabilize the depressed housing market, and the central bank may take additional steps to balance the risks for the region as households face tightening credit conditions paired with the deterioration in the labor market. In turn, the Fed may see scope to conduct additional quantitative easing over the coming months to stimulate the ailing economy, and the central bank is likely to hold a cautious tone going into 2011 as the fundamental outlook remains clouded with uncertainties.

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

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