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

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

2010-07-13 18:31:00
David Song, Currency Strategist
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Trading the News: U.S. Advance Retail Sales

Why Is This Event Important:


However, as market sentiment continues to drive price action in the currency market, a rise in risk aversion could spark a bullish reaction in the greenback as it benefits from safe-haven flows.

What’s Expected:
Time of release:        07/14/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    EURUSD
Expected:         -0.3%
Previous:         -1.2%

Will This Be Market Moving (Scenarios):


Retail spending is forecasted to contract another 0.3% in June after unexpectedly falling 1.2% during the previous month, and the Fed may see scope to hold the benchmark interest rate near zero throughout the second-half of 2010 as households continue to face tightening credit conditions paired with the deterioration in the labor market. As a result, the Fed policy meeting minutes due out at 18:00 GMT may show an increased willingness for the central bank  to support the economy over the coming months, and dovish rhetoric could weigh on the greenback as investors scale back expectations for a rate hike.

The Upside


The U. of Michigan confidence survey jumped to a two-year high of 76.0 in June from 73.6 in the previous month, with chain store sales advancing for the third consecutive month during the same period, and the rise in household sentiment could lead to an unexpected rise in personal consumption as the economy emerges from the worst recession since the Great Depression. Accordingly, a rebound in private spending is likely to encourage an improved outlook for the economy as it remains the leading driver of growth, which could lead the U.S. dollar to appreciate against its major counterparts as investors weigh the prospects for a sustainable recovery.

The Downside


However, employment in the world’s largest economy contracted 125K in June to mark the first decline this year, with average hourly earnings slipping 0.1% during the same period, and the ongoing weakness in the labor market could lead households scale back on consumption and increase their rate of savings. As a result, the Fed may hold a cautious outlook for future growth and look to support the economy throughout the remainder of 2010 in order to encourage a sustainable recovery.

How To Trade This Event Risk


Forecasts for a drop in household spending certainly favors a bearish outlook for the greenback but nevertheless, price action following an enhanced sales report could set the stage for a long U.S. dollar trade as growth prospects improve. Therefore, if private consumption increases 0.2% or greater from the previous month, we will need to see a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, 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 reaches its mark in an effort to lock-in our profits.

On the other hand, the weakness in the labor market paired with tightening credit conditions may lead households to cut back on consumption, and a dismal sales reading could spark a bearish reaction in the greenback as the economic outlook deteriorates. As a result, if spending contacts 0.3% or greater from the previous month, we will favor a bearish outlook for the reserve currency, and will implement the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

07.13_TTN1

Impact U.S. Advance Retail Sales has had on USD during the previous month

07.13_TTN2

May 2010 U.S. Advance Retail Sales

Retail spending in the world’s largest economy unexpectedly plunged 1.2% in May, which marked the first decline in eight months, and the ongoing weakness in the private sector may lead the Federal Reserve to maintain a loose policy stance throughout the second-half of the year in order to encourage a sustainable recovery. The breakdown of the report showed spending on building materials slumped 9.3% to lead the decline, with discretionary spending on clothing contracting 1.3%, while demands for furniture advanced 1.0% after falling 2.0% in April. As households face tightening credit conditions paired with the deterioration in the labor market, consumer spending may fall back further over the coming months, and Fed Chairman Ben Bernanke may look to maintain his pledge to hold borrowing costs near zero for an “extended period” of time as the central bank aims to mitigate the downside risks for the economy. 07.13_TTN3

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 EUR 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 EUR 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.
00001_EUR 00002_EUR

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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