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EURUSD: Trading the U.S. Retail Sales Report

By , Currency Analyst
13 June 2012 06:00 GMT

Trading the News: U.S. Advance Retail Sales

What’s Expected:

Time of release: 06/13/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: -0.2%

Previous: 0.1%

DailyFX Forecast: -0.3% to 0.2%

Why Is This Event Important:

U.S. retail sales are expected to contract 0.2% in May and the downturn in private sector consumption may drag on the dollar as it dampens the outlook for growth. As Fed officials remain cautious optimistic towards the economy, a marked contraction in household spending may spur dovish comments from the FOMC, and the central bank may keep the door open to expand its balance sheet further as the sovereign debt crisis continues to pose a threat to the recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

ICSC Chain Store Sales (YoY) (MAY)

--

1.7%

U. of Michigan Confidence (MAY F)

77.8

79.3

Durable Goods Orders (APR)

0.2%

0.2%

The Downside

Release

Expected

Actual

Personal Income (APR)

0.3%

0.2%

Average Hourly Earnings (YoY) (MAY)

1.8%

1.7%

Change in Non-Farm Payrolls (MAY)

150K

69K

As household sentiment picks up, the resilience in private sector consumption may generate an above-forecast print, and the Fed may continue to move away from its easing cycle as the economy gets on a more sustainable path. However, subdued wage growth paired with the ongoing weakness in the labor market may continue to curb household spending, and a downturn in sales may reignite speculation for another round of quantitative easing as the central bank aims to encourage a sustainable recovery. In turn, a dismal report may spark a rebound in the EURUSD, and we may see the pair work its way back towards the 23.6% Fibonacci retracement around 1.2640-50 as market participants increase bets for QE3.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Retail_Sales_Report_body_ScreenShot087.png, EURUSD: Trading the U.S. Retail Sales Report

As the EURUSD maintains the downward trend from 2011, we remain bearish against the pair, but a dismal sales report may spark another run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as it raises the scope more easing. However, as the relative strength index fails to maintain the upward trend from earlier this month, the pair looks poised to consolidate ahead of the Greek elections, and an uptick in private sector consumption may push the EURUSD back down wards the 1.2300 as it saps speculation for additional monetary support. For a complete EURUSD technical outlook and scalp levels, refer to this week's Scalp Report.

How To Trade This Event Risk

Forecasts for a drop in retail sales certainly casts a bearish outlook for the greenback, but an above-forecast print could pave the way for a long U.S. dollar trade as it dampens expectations for more easing. Therefore, if private spending holds flat or unexpectedly increases from the previous month, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in order to preserve our gains.

On the other hand, the lack of wage growth paired with the protracted recovery in the labor market may ultimately lead to a weak sales report, and a marked contraction in household spending may dampen the appeal of the greenback as currency traders maintain bets for more easing. As a result, if consumption tracks lower from the previous month, we will implement the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Advance Retail Sales report has had on USD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR 2012

05/15/2012 12:30 GMT

0.1%

0.1%

-45

-112

April 2012 U.S. Advance Retail Sales

EURUSD_Trading_the_U.S._Retail_Sales_Report_body_ScreenShot078.png, EURUSD: Trading the U.S. Retail Sales Report

Household consumption increased 0.1% in April, with nine of the 13 major categories advancing, while a separate report showed consumer prices growing at an annualized pace of 2.3% during the same period to mark the slowest pace of growth since February 2011. Although the initial reaction was fairly muted, the slipped below 1.2800 as market participants scaled back their appetite for risk, and we saw the pair track lower throughout the North American trade as it ended the day at 1.2728.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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13 June 2012 06:00 GMT