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GBP/USD Bullish RSI Momentum Susceptible to Weak U.K. Retail Sales

GBP/USD Bullish RSI Momentum Susceptible to Weak U.K. Retail Sales

David Song, Shuyang Ren,

- U.K. Retail Sales to Contract for First Time in Four Months.

- Will Lower Energy Prices & Faster Job/Wage Growth Boost Consumption?

Trading the News: U.K. Retail Sales

A contraction in U.K. Retail Sales may spur a near-term pullback in GBP/USD as it dampens the outlook for a stronger recovery in 2015.

What’s Expected:

GBP/USD Retail Sales

Click Here for the DailyFX Calendar

Why Is This Event Important:

However, we may see private-sector consumption outpace market expectations as the Bank of England (BoE) anticipates lower energy prices to boost disposable incomes, and Governor Mark Carney may continue to prepare U.K. households and businesses for higher borrowing-costs as the central bank head turns increasingly upbeat towards the economy.

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Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (JAN)

1.4%

1.4%

Net Consumer Credit (DEC)

1.2B

0.6B

Gross Domestic Product (QoQ) (4Q A)

0.6%

0.5%

The stickiness in core inflation paired with the slowdown in private-sector credit may trigger a marked decline in U.K. Retail Sales, and a dismal data print may spur a near-term pullback in GBP/USD as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Jobless Claims Change (JAN)

-25.0K

-38.6K

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

1.7%

2.1%

GfK Consumer Confidence (JAN)

-2

1

Nevertheless, improved confidence paired with the pickup in job/wage growth may produce a better-than-expected sales report, and a further improvement in household spending may encourage the BoE to raise the benchmark interest rate sooner rather than later as heightens the prospects for a stronger recovery.

How To Trade This Event Risk(Video)

Bearish GBP Trade: Private Spending in U.K. Contracts 0.2% or Greater

  • Need red, five-minute candle following the release to consider a short British Pound trade
  • If market reaction favors short sterling trade, sell 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: Retail Sales Exceeds Market Forecast

  • 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 Chart

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Lack of momentum to preserve the bullish trend in RSI may highlight a near-term top in GBP/USD as it fails to push back above the former support region.
  • Interim Resistance: 1.5500 pivot to 1.5520 (38.2% expansion)
  • Interim Support: 1.5250 (100% expansion) to 1.5270 (38.2% retracement)

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)

DEC 2014

01/23/2015 9:30 GMT

-0.6%

0.4%

+12

+16

December 2014 U.K. Retail Sales

GBP/USD Bullish RSI Momentum Susceptible to Weak U.K. Retail Sales

U.K. Retail Sales unexpectedly rose another 0.4% in December following the 1.6% expansion the month prior, which was largely driven by falling energy prices. The low inflation environment paired with the ongoing improvement in the labor market may encourage a stronger recovery in the U.K. as it boosts private-sector consumption, one of the leading drivers of growth. Despite the positive results, the lack of follow-through behind the initial reaction kept GBP/USD within the weekly range, with the pair closing at 1.4978.

--- Written by David Song, Currency Analyst and Shuyang Ren

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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