Existing home sales are expected to have fallen to 4.85 million as the housing market continues to deteriorate. Buyers have been reluctant to buy, as property values continue to decline and rising foreclosures add to inventories. The glut of homes for sell is expected to grow as mortgage delinquencies rose to a 23 year high of 5.82 million from 5.59, while applications fell 7.8%. The Fed’s efforts to promote lending and stem the credit crisis in the form of liquidity infusions and rate cuts have failed to lubricate a market filled with sticky banks and tepid buyers. The house price index showed a 0.2% decline in the first quarter as seller continue to slash prices. Although, the belief is that the majority of the problems in the financial system have passed, the central bank stated in their minutes from their last meeting that risks remain. Yet, the MPC has signaled that it will pause in its easing policy, as inflation concerns have become a priority with oil rising above $135 a barrel. The prospect of the end of easing and the potential for rate hikes- as many believe the Fed will hike to avoid developing future bubbles- may inspire buyers to borrow at the current lower rates. However, last months fall in new home sales is a sign that the weakness will continue to persist in the market as it is typically a forward looking indicator. As long as the housing market continues to decline the economic growth outlook for the U.S will continue to have a recessionary tone. The decline in property values, inflation and continued layoffs have already brought consumer confidence to a 28 year low.

There is little anticipation for an improvement in existing home sales, therefore, a strong improvement may catch the market off guard and lead to a rally from the greenback. Despite all the dour housing data building permits actually rose 4.9% to 978,000. Also, the leading indicator gauge saw an 0.1% improvement signaling that the outlook for the next three months is improving. Therefore an improvement in housing may be enough to bring back dollar bulls and stop the greenback’s recent slide. We will still look for existing home sales of at least 5 million before considering a long dollar (short EUR/USD) position. With the right fundamentals and a red five minute candle, we will go short two lots with a stop above the nearby swing high (or reasonable distance). Our first target will equal the risk and the second will be set by discretion. To conserve profit on a winning trade, we will move the stop on the second lot to break even when the first takes profit.

On the other hand, weaker than expected existing home sales will rekindle recession fears and talk of stagflation. An inline print or worse should be enough to trigger a dollar bearish trade. Therefore, for a short trade we will follow the same strategy as above, just in reverse.

David Rodriguez is a Currency Analyst at FXCM.