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GBPUSD: Trading the U.K. Retail Sales Report

GBPUSD: Trading the U.K. Retail Sales Report

David Song, Strategist

Trading the News: U.K. Retail Sales

What’s Expected:

Time of release:07/19/2012 8:30 GMT, 4:30 EDT

Primary Pair Impact: GBPUSD

Expected: 0.4%

Previous: 0.9%

DailyFX Forecast: 0.4% - 0.6%

Why Is This Event Important:

U.K. retail sales are expected to increase another 0.4% in June and the ongoing improvement in private sector consumption may instill a bullish outlook for the British Pound as it raises the prospects for future growth. As the Bank of England maintains a cautious outlook for the region, a positive development may encourage the central bank to soften its dovish tone for monetary policy, and we may see the MPC implement a wait-and-see approach throughout the remainder of the year as central bank officials anticipate to see a more robust recovery in the coming months.

Recent Economic Developments

The Upside

Release

Expected

Actual

Average Weekly Earnings inc Bonus (3MoY) (MAY)

1.4%

1.5%

Consumer Price Index (YoY) (JUN)

2.8%

2.4%

Net Consumer Credit (MAY)

0.2B

0.7B

The Downside

Release

Expected

Actual

Jobless Claims Change (JUN)

5.0K

6.1

NIESR GDP Estimate (JUN)

--

-0.2%

GfK Consumer Confidence Survey (JUN)

-29

-29

The uptick in wage growth paired with the ongoing expansion in private sector credit certainly bodes well for private consumption, and a marked rise in retail sales may dampen expectations for additional monetary support as the economic recovery gradually gathers pace. However, the persistent weakness in the labor market paired with fears of a prolonged recession may continue to drag on consumer confidence, and we may see household scale back on discretionary spending as the sovereign debt crisis continues to dampen the outlook for the U.K.

Potential Price Targets For The Release

GBPUSD_Trading_the_U.K._Retail_Sales_Report_body_ScreenShot065.png, GBPUSD: Trading the U.K. Retail Sales Report

As the GBPUSD continues to hold below the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, the series of lower highs paired with lower lows casts a bearish outlook for the pair, but we may see the rebound from 1.53962 gather pace should the retail sales report dampen expectations for more quantitative easing. If the figure tops market expectations, we may see the GBPUSD make another run at the 100-Day SMA (1.5790), but anything below forecast may push the pound-dollar down towards the 1.5400 figure as it raises the scope for additional monetary support.

How To Trade This Event Risk

Forecasts for a second consecutive rise in retail sales instills a bullish outlook for the sterling, and a positive development may pave the way for a long British Pound trade as it curbs bets for more QE. Therefore, if spending increases 0.4% or greater in June, we will need a green, five-minute candle following the report to establish a buy entry on two-lots of GBPUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the firs trade hits its mark in an effort to preserve our gains.

In contrast, the protracted recovery in the labor market paired with fears of a deeper economic downturn may sap household spending, and a drop in consumption may fuel bets for additional easing as the central bank continues to embark on its easing cycle. As a result, if the print misses market expectations, we will carry out the same strategy for a short pound-dollar trade as the long position mentioned above, just in the opposite direction.

Impact that U.K. Retail Sales has had on GBP during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2012

06/21/2012 8:30 GMT

0.7%

0.9%

+43

-95

May 2012 U.K. Retail Sales ex Auto Fuel

GBPUSD_Trading_the_U.K._Retail_Sales_Report_body_ScreenShot063.png, GBPUSD: Trading the U.K. Retail Sales Report

Household spending increased 0.9% in May, led by a 6.2% rise in demands for auto fuel, while discretionary spending on clothing and footwear advanced 3.4% after contracting 5.5% in the previous month. As the rebound in retail sales raises the outlook for growth, the GBPUSD pushed back above the 1.5700 figure, but the sterling failed to hold its ground during the North American trade as the pair ended the day at 1.5588.

--- Written by David Song, Currency Analyst

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

o 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

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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