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

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

2011-10-12 19:43:00
David Song, Currency Strategist
Share:

Trading the News: U.S. Advance Retail Sales

What’s Expected:

Time of release: 10/14/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 0.7%

Previous: 0.0%

DailyFX Forecast: 0.2% to 0.8%

Why Is This Event Important:

Household spending in the world’s largest economy is expected to increase 0.7% in September and the rebound in private sector consumption could spark a bullish reaction in the U.S. dollar as it instills an improved outlook for the region. As private sector consumption remains one of the leading drivers of growth, a positive development may encourage the Fed to raise its fundamental assessment, and the central bank may bring its easing cycle to end as policy makers see economic activity gathering pace over the coming months. However, the heightening risk of a double-dip recession may lead the Fed to maintain a dovish outlook for monetary policy, and the central bank may keep the door open to conduct another round of quantitative easing in an effort to encourage a sustainable recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

Change in Non-Farm Payrolls (SEP)

60K

103K

Domestic Vehicle Sales (SEP)

9.75M

10.17M

Personal Consumption (2Q F)

0.4%

0.7%

The Downside

Release

Expected

Actual

Consumer Credit (AUG)

$8.000B

-$9.501B

Personal Income (AUG)

0.1%

-0.1%

Consumer Confidence (SEP)

46.0

45.4

The pickup in job growth paired with expectations for a stronger recovery may spur a larger-than-expected rise in retail sales, and a positive consumption report may spark a short-term reversal in the EUR/USD as the outlook for the world’s largest economy improves. However, the drop in wage growth along with the downturn in consumer credit may weigh on consumption, and the dollar may continue to give back the advance from the previous month as growth prospects deteriorate. In turn, the EUR/USD may extend the rebound from 1.3145, and the exchange rate may work its way back above the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900 as market participants see the FOMC easing monetary policy further over the coming months.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Retail_Sales_Report_body_ScreenShot082.png, EUR/USD: Trading the U.S. Retail Sales Report

How To Trade This Event Risk

Expectations for a positive retail sales figure encourages a bullish outlook for the greenback, and the market reaction could set the stage for a long U.S. dollar trade as the fundamental outlook for the world’s largest economy improves. Therefore, if consumption increases by 0.7% or greater, we will need a red, five-minute candle following the release to generate 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 from the entry, and this risk will establish 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 order to preserve our profits.

In contrast, fears of a double-dip recession paired with the slowdown in wage growth may push households to scale back on spending, and a dismal consumption report may heighten speculation for QE3 as the Fed steps up its effort to stimulate the ailing economy. As a result, if retail sales fail to meet market expectations, we will implement the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

Impact that the U.S. 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)

AUG 2011

09/14/2011 12:30 GMT

0.2%

0.0%

-3

+32

August 2011 U.S. Advance Retail Sales

Retail sales in the world’s largest economy held flat in August after expanding a revised 0.3% in the previous month, and the slowdown in household spending dampens the outlook for future growth as private sector consumption remains one of the leading drivers of growth. The breakdown of the report showed demands for motor vehicle and parts slipped 0.3% from the previous month, with discretionary spending on clothing falling 0.7% during the same period, while gasoline receipts increased another 0.3% after climbing 0.9% in July. The slowing recovery may encourage the Fed to increase its efforts in stimulating the ailing economy, and the FOMC may carry its easing cycle into the following year as growth and inflation falter. The initial reaction to the dismal sales report was short-lived, with the EUR/USD slipping back below 1.3700, but the greenback struggled to hold its ground during the North American trade as the exchange rate settled at 1.3754 at the end of the day.

EURUSD_Trading_the_U.S._Retail_Sales_Report_body_ScreenShot024.png, EUR/USD: Trading the U.S. Retail Sales Report

--- 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.

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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