U.S. pending home sales is anticipated to fall another 1.1% after declining 3.2% in July, which suggests that the downturn in the housing sector will continue to limit economic activity throughout the second half of the year. In fact, falling home values paired with tighter lending practices has led existing home sales to slip 2.2% in August, and was followed by a 11.5% drop in new home sales, which was the biggest decline in since 1991. Furthermore, building activity throughout the country faltered as housing starts dipped 6.2% to 895K - the lowest level in 17 years - while building permits dived 8.9% to 854K from 937K in July. Indeed, growth prospects for the world’s largest economy have certain weakened as second quarter GDP was revised lower to 2.8% from a preliminary reading of 3.3%, and will be an ongoing concern as the effects of the credit crunch spills into the global economy. More recently we saw that banks throughout the globe have become increasingly reluctant to lend to one another, and poses an even greater threat to the global financial market as financial institutions throughout the world find themselves in troubled waters. Mounting growth concerns has pushed central banks worldwide to provide sufficient liquidity to keep the financial market afloat, and has led the Fed to double the Term Auction Facility (TAF) to nearly $900B. The central bank went a step further to help the ailing economy as they offered interest payments on bank reserves held at the Federal Reserve under the $700B bailout package signed by the Congress last week, and may allow the FOMC to hold a neutral policy stance going forward.

The increased efforts by the Fed to flood the markets with extra liquidity should help to calm financial fears in the near-term, and a less than expected drop in home sales could support a bullish outlook for the U.S. dollar. Therefore, an enhanced sales reading would favor a long dollar trade, and we will look for a red, five-minute candle to confirm a short entry on two lots of EUR/USD. Our initial stop will be place above the nearby swing high (or reasonable distance) and our first target will equal this risk. Our second target will be based on discretion, and to preserve our profits, we will move the second stop to breakeven once the first trade reaches its target.

Conversely, if pending home sales falls for the second consecutive month, there could be increased pressures for the FOMC to lower the interest rate this month, which would only fuel bearish sentiment for the greenback. Therefore, we will look for a inline or greater contraction in home sales for a EUR/USD long trade, and will follow the same strategy as a short, just in reverse.

Jamie Saettele is a Technical Currency Analyst for FXCM.