Trading the News: U.S. Existing Home Sales

Why Is This Event Important:

Demands for existing homes in the U.S. are expected to increase for the second consecutive month in December, and the data could lead the greenback to recoup the losses from earlier this month as the outlook for growth and inflation improves. However, the substantial amount of slack within the real economy is likely to drag on private sector activity, and the recovery may moderate further over the medium-term as households cope with tightening credit conditions paired with the ongoing weakness in the labor market.

What’s Expected:

Time of release:01/20/2011 15:00 GMT, 10:00 EST

Primary Pair Impact :EURUSD

Expected: 4.1%

Previous: 5.6%

DailyFX Forecast:0.0% to 4.6%

Will This Be Market Moving (Scenarios):

Existing home sales in the world’s largest economy are forecasted to increase 4.1% to an annualized pace of 4.87M in December, and the recovery is likely to gather pace over the coming months as the central bank takes unprecedented steps to balance the risks for the region. However, a dismal housing report could spark a bearish reaction in the U.S. dollar as market participants speculate the FOMC to ease monetary policy further this year, and the recent weakness underlying the greenback may carry into February as growth prospects deteriorate.

The Upside

As consumer credit expands for the second consecutive month in November, with household spending increasing throughout the second-half of 2010, home purchases are likely to gather pace as private sector consumption accelerates. In turn, the housing market should gradually improve going forward, and a marked expansion in home sales could lead the EUR/USD to pare the advance from earlier this week as the recovery in the world’s largest economy picks up steam.

The Downside

However, as consumer confidence wanes, with households facing rising food and energy costs, potential homebuyers may curb their willingness to purchase property as the economic outlook remains clouded with high uncertainty. Accordingly, a dismal housing report could spark another round of U.S. dollar selling, and the EUR/USD may continue to retrace the decline from back in November as growth and inflation remains subdued.

How To Trade This Event Risk

Expectations for a second consecutive rise in existing home sales certainly reinforces a bullish outlook for the greenback, and price action following the report could set the stage for a long U.S. dollar trade as growth prospects improve. Therefore, if demands increase 4.1% or greater in December, we will need a red, five-minute candle subsequent to the release to generate 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 establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, we may see a dismal housing report as consumers face higher living costs paired with the ongoing weakness within the labor market, and the recent weakness in the greenback may intensify over the near-term as the Fed maintains a cautious outlook for the real economy. As a result, if sales of existing homes grows less than 2.0% or unexpectedly contracts from the previous month, we will carry out 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

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Impact that U.S. existing 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)

Nov 2010

12/22/2010 15:00 GMT

7.1%

5.6%

+9

+10

 

November 2010 U.S. Existing Home Sales

Sales of existing homes in the U.S. increased 5.6% to 4.68M in November amid forecasts for a 7.1% advance, while home prices unexpectedly increased 0.7% in October following the 1.2% contraction in the month prior. A deeper look at the report showed sales of single-family homes jumped 6.7% to lead the advance, while purchases of condos and co-ops slipped another 1.9% after falling 3.6% in October. As households cope with tightening credit conditions paired with the deterioration in the labor market, the housing market is likely to remain depressed throughout the first-half of 2011, and the ongoing weakness in the private sector is likely to bear down on the recovery as the Fed expects to see a moderate pace of economic growth. In turn, the Fed may see scope to expand monetary policy further over the following year, and the central bank may support the economy throughout the medium-term as growth and inflation remains subdued.

 

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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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