GBP/USD: Trading the U.K. Retail Sales Report

Trading the News: U.K. Retail Sales

What’s Expected
Time of release:        03/25/2010 09:30 GMT, 05:30 EST
Primary Pair Impact :    GBPUSD
Expected:         0.6%
Previous:         -1.2%

Effect the U.K. Retail Sales report had over GBPUSD for the past 2 months

January 2010 U.K. Retail Sales

Household spending in Great Britain slumped 1.2% in January, which far exceeded projections for a 0.5% decline, and consumers may scale back their temperament to spend throughout the first-half of the year as policy makers continue to see a risk for a protracted recovery. The breakdown of the report showed sales of household goods tumbled 13.4% to lead the decline, while discretionary spending on clothing and footwear increased 4.7% after holding flat in December. As households face fading demands for employment paired with the drop in wage growth, private sector consumption is likely to remain weak throughout the near-term, but conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy.

December 2009 U.K. Retail Sales

Retail sales in the U.K. advanced 0.3% in December, which fell short of expectations for a 1.1% rise, and households may keep a lid on spending over the coming months as they face a weakening labor market paired with tightening credit conditions. A deeper look at the report showed spending on household goods increased 0.5%, with spending at non-food stores tipping 0.1% higher, while sales at non-specialized stores slumped 1.0% after contracting 4.2% in November. As the risks for a double dip recession intensify, the Bank of England is widely expected to maintain a dovish policy stance throughout the first-half of 2010, and the central bank may see scope to expand its asset purchase program beyond the GBP 200B target in order 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 Pound 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 GBPUSD 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 Pound 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 GBPUSD ahead of the data release.

How To Trade This Event Risk

The British Pound is likely to face increased volatility over the next 24 hours of trading as economists forecast retail sales excluding demands for auto fuel to increase 0.6% in February after contracting 1.2% in the previous month, and the data could encourage an improved outlook for the U.K. as the expansion in monetary and fiscal policy continues to feed through the real economy. The preliminary 4Q GDP reading showed the growth rate expanded less-than-expected, weighed by a 3.1% drop in business investments, while a 1.2% jump in government spending helped to support economic activity throughout the last three-months of 2009. At the same time, a report by the Confederation of British Industry showed the gauge for household spending increased to 23 from -8 in January, while the British Retail Consortium saw a 4.5% in retail sales, and conditions are likely to improve going forward as policy makers aim to promote a sustainable recovery in the U.K. However, Bank of England board member Andrew Sentance held a cautious outlook for the economy during an interview with CNBC television and said that he would not “rule out some new shocks emerging on the financial front,” which could lead to a “double dip recession,” but went onto say that inflation remains above the central banks February forecast despite the ongoing weakness in the private sector.

The BoE held a dovish outlook in its quarter inflation report and said that the recovery was “somewhat weaker” than expected, with the ongoing slack in the real economy weighing on the outlook for growth and inflation. As a result, the central bank anticipates to see a moderate recovery this year and projects GDP to increase 1.4% in 2010 amid an initial forecasts for a 2.2% expansion, while inflation is projected to fall back below the 2% target later this year. Moreover, BoE Governor Mervyn King reiterated that he continues to see a “substantial margin” of slack in his letter to Chancellor of the Exchequer Alistair Darling, and went onto say subdued wage growth would continue to drag on economic activity as private-sector spending remains one of the leading drivers of growth. Meanwhile, Mr. Darling reiterated that he expected GDP to expand 1.0%-1.5% this year and sees scope for the growth rate to rise 3.0%-3.5% in 2011, which is slightly lower from his initial forecast for a 3.25%-3.75% increase in economic activity, and policy makers are likely to maintain a loose stance throughout the first-half of the year in an effort to balance the risks for the economy.

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