EUR/USD: Trading the U.S. Advanced Retail Sales Report

Trading the News: U.S. Advanced Retail Sales

What’s Expected
Time of release:        2/11/2010 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         0.3%
Previous:         -0.3%

Impact the U.S. retail sales report has had over EURUSD for the past 2 months

December 2009 U.S. Retail Sales

U.S. retail sales slid 0.3% in December from a upward revision of 1.8% the previous month, which failed to meet forecasts for a 0.5% rise. Despite the optimism held for the holiday shopping season, the report signals that the economic recovery will be uneven as uncertainty in the labor market persists, with households continuing to face tightening credit conditions. Taking a closer look at the report, auto sales tumbled 0.8% during the month after shedding 1.2% the month prior, with electronic stores retreating 2.6%, while sporting and book rose 1.6% to taper the decline. Looking ahead, the slump in private consumption is likely to weigh on the recovery as consumers scale back spending amid deepened economic uncertainty, and the Fed may keep the benchmark interest rate at the record-low throughout the first-half of the year as the central bank aims to balance the risks for growth and inflation.

November 2009 U.S. Retail Sales

Retail spending in November leapt 1.3% from a downward revision of 1.1% in October, with economists’ expectations of 0.6%, and adds signs that consumer spending is gathering momentum into 2010, the Commerce Department figures illustrated. With the cash-for-clunkers program officially over, the upbeat reading in auto sales advanced 1.9% over the past 12 months, marking the first year-over-year advancement since August 2008, while  purchases excluding auto sales pushed 1.2% higher. According to the medium estimate of economists surveyed this month, consumer spending will likely tipped higher at an annual 1.7% this quarter as the world’s largest economy expands at a 3% subsequent to gaining 2.8% in the 3rd quarter, and the central bank will probably keep interest rates unchanged in order to cement economic recovery.

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 Euro 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 Euro 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.

How To Trade This Event Risk

Retail spending in the U.S. is expected to improve in January, with economists  forecasting a 0.3% rise following the unexpected contraction during the holiday season, and the data is likely to encourage an improved outlook for the world’s largest economy as it emerges from the worst recession since the Great Depression. The advanced 4Q GDP report encouraged an enhanced outlook for the region as the growth rate increased at an annual pace of 5.7% to top forecasts for a 4.7% expansion, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. The Conference Board’s consumer sentiment index jumped to 55.9 from a revised 53.6 in the previous month to mark the highest reading since September 2008, with the U. of Michigan Confidence survey advancing to a two-year high of 74.4 during the same period, while chain-store sales increased at an annual pace of 3.0% in January after rising a revised 2.6% in the previous month. However, a separate report by the Labor Department showed non-farm payrolls slumped 20K during the first month of 2010 after contracting a revised 150K in the previous month, and fading demands for employment paired with tightening credit conditions may lead households to keep a lid on spending as policy makers expect to see a “moderate” recovery this year.

The Federal Open Market Committee held the benchmark interest rate at the record-low of 0.25% in January and reiterated that borrowing costs will stay low for an “extended period” of time as the central bank aims to balance the risks for growth and inflation. The Fed stated economic conditions continued to improve and noted that the deterioration in the labor market appears to be “abating,” but expects to see a “moderate” recovery for a time as private spending “remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.” Moreover, the central bank saw business spending “picking up” even as they remained “reluctant” to expand their labor force, and expects “a gradual return to higher levels of resource utilization” as the policy makers continue to support the economy. However, MPC member Thomas Hoenig dissented and said that keeping the interest rate at the record-low for an “extend period” period of time was “no longer warranted,” and the central bank may turn increasingly hawkish over the coming months as the recovery continues to gather momentum.

Expectations for a rise in retail spending favors a bullish outlook for the greenback as private consumption remains one of the leading drivers of growth, and price action following the release could set the stage for a long dollar trade as investors anticipate the Fed to normalize policy this year. Therefore, is sales increased 0.3% or greater from the previous month, we will need to see a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance taking volatility into account, and this risk will establish our first target. Our 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 target in order to preserve our profits.

In contrast, the ongoing deterioration in the labor market paired with tightening credit standards may lead households to scale back on consumption, and a drop in sales could weigh on the exchange rate as the central bank holds a cautious outlook for the economy. As a result, if spending contracts 0.2% or greater, we will favor a bearish outlook for the greenback and will utilize the same setup for a long euro-dollar trade as the long position mentioned above, just in reverse.

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