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

Trading the News: U.S. Advanced Retail Sales

What’s Expected
Time of release:        03/12/2010 13:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         -0.2%
Previous:         0.5%

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

January 2010 U.S. Retail Sales

Retail spending increased more than expected in January, with the reading climbing for the third time in the past four months. Sales gained 0.5% during the month after shedding a revised 0.1% in the previous month, which exceeded expectations for a 0.3% rise. The breakdown of the report showed that general merchandise sales posted the largest increase, rising 1.5%, which was followed by a 1.2% advance in electronics. Going forward, the Fed is likely to keep borrowing at the record-low of 0.25% as households continue to face fading demands for employment paired with tightening credit conditions, and the MPC may hold a dovish policy stance going into the second-half of the year as the central bank aims to encourage a sustainable recovery.

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.

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

The U.S. dollar is likely to face increased volatility over the next 24 hours of trading as economists forecast retail spending in the world’s largest economy to contract 0.2% in February, and the ongoing weakness in the private sector could lead the Federal Reserve to maintain a dovish policy stance over the coming months as the central bank aims to encourage a sustainable recovery. Nevertheless, the preliminary 4Q GDP report showed private spending advanced 1.7%, which fell short of expectations for a 2.0% rise, while disposable incomes slumped 0.4% in January to mark the biggest decline since July. Moreover, domestic vehicle sales slumped to a five-month low of 7.91M in February, with non-farm payrolls contracting 36K during the same period, and the deterioration in the labor market may lead households to keep a lid on consumption as policy makers see a risk for a protracted recovery.

The Fed’s Beige Book release earlier this month said economic conditions in nine of the twelve districts improved, with household consumption increasing “slightly” in most regions, but saw “minimal” wage growth paired with “weak” demands for borrowing. At the same time, the central bank said non-financial service-based activity were “steady or improved” for the most part, with manufacturing expanding “further,” while “hiring plans still remained generally soft.” Nevertheless, Fed Chairman Ben Bernanke expects to see a “nascent” recovery this year and argued that “a sustained recovery will depend on continued growth” in private-sector demands during his testimony in front of the House Financial Services Committee, and went onto say that “increasing incidence of long-term unemployment” remains a major area of concern for the central bank. As a result, the FOMC is likely to keep the benchmark interest rate at the record-low of 0.25% for an “extended” period of time as households continue to face a weakening labor market paired with tightening credit conditions, but the expansion in monetary and fiscal policy is likely to support economic activity going forward as the stimulus continues to feed through the real economy.

Trading the given event risk certainly favors a bearish outlook for the greenback as market participants expect to see a drop in private consumption but nevertheless, an enhanced sales report could set the stage for a long U.S. dollar trade. Therefore, if we see household spending hold flat or unexpectedly improve in February, we would need to see a red, five-minute candle following the data to confirm a sell entry on two-lots of EUR/USD. Once these conditions are fulfill, we will set the initial stop at the nearby swing high or a reasonable distance, and this risk will establish our first objective. The second mark will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

In contrast, the ongoing deterioration in the labor market paired with the slump in wage growth may lead households to keep a lid on spending, and a dismal sales report could drag on the exchange rate as investors weigh the prospects for a sustainable recovery in the U.S. As a result, if private consumption slipped 0.2% or greater from the previous month, we will favor a bearish outlook for the greenback, and will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

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