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GBP/USD at Risk for Larger Pullback as U.K. Retail Sales Falter

GBP/USD at Risk for Larger Pullback as U.K. Retail Sales Falter

David Song, Strategist

- U.K. Retail Sales to Contract for Second Time in 2014

- Private Sector Spending Increased 7 of the 12 Months in 2013

Trading the News: U.K. Retail Sales

The British Pound may face a larger correction over the remainder of the week as U.K. Retail Sales are expected to contract 0.5% in March.

What’s Expected:

GBP/USD at Risk for Larger Pullback as U.K. Retail Sales FalterGBP/USD Retail Sales

Why Is This Event Important:

A decline in private sector consumption may prompt a bearish reaction in the GBP/USD as it limits the Bank of England’s (BoE) scope to normalize monetary policy sooner rather than later, but the data print may exceed market expectations as Governor Mark Carney sees a stronger recovery in 2014.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (MAR)

1.6%

1.6%

Producer Price Index- Output n.s.a. (YoY) (MAR)

0.3%

0.5%

Net Consumer Credit (FEB)

0.7B

0.6B

Sticky price growth along with the slowdown in private sector credit may drag on consumption, and a marked decline in retail sales may prompt a larger pullback in the GBP/USD as it dampens the outlook for growth and inflation.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

CBI Reported Sales (APR)

17

30

Jobless Claims Change (MAR)

-30.0K

-30.4K

Average Weekly Earnings inc Bonus (FEB)

1.8%

1.7%

Nevertheless, positive real wage growth paired with the ongoing improvement in the labor market may prompt a further expansion in household spending, and a better-than-expected print may heighten the appeal of the sterling as it puts increased pressure on the BoE to raise the benchmark interest rate off of the record-low.

Join DailyFX on Demand to Cover Current British Pound Trade Setups

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Retail Sales Disappoints

  • Need red, five-minute candle following the release to consider a short British Pound trade
  • If market reaction favors selling sterling, short GBP/USD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bullish GBP Trade: Household Spending Unexpectedly Picks Up

  • Need green, five-minute candle to favor a long GBP/USD trade
  • Implement same setup as the bearish British Pound trade, just in opposite direction

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Bullish RSI Momentum Continues to Favor Fresh Highs
  • Interim Resistance: 1.6850-60 (78.6% expansion)
  • Interim Support: 1.6400 (61.8% expansion) to 1.6430 (23.6% expansion)

Impact that the U.K. Retail Sales report 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)

FEB 2014

03/27/2014 9:30 GMT

0.5%

1.7%

+57

+54

February 2014 U.K. Retail Sales

GBP/USD Chart

Retail sales out of the U.K. beat across the board in February and sent GBP over 50 pips higher against the greenback. Textiles saw heavy weakness relative to other stores while predominantly food stores had a healthy 1.9% gain vs. a 3.7% decline in January. After the Pound pulled off key resistance levels on Wednesday, room remains for another test of resistance if we do see another beat this month. Note that we have U.K. GDP data to kick off event risk on Tuesday of next week.

--- Written by David Song, Currency Analyst and Gregory Marks

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

To be added to David's e-mail distribution list, please follow this link.

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