- U.K. Retail Sales to Pick Up for First Time Since November.

- Will Lower Energy Prices Boost Private-Sector Spending?

Trading the News: U.K. Retail Sales

A 0.4% rebound in U.S. Retail Sales may improve the British Pound’s appeal and generate a more meaningful rebound in GBP/USD as it puts increased pressure on the Bank of England (BoE) to normalize monetary policy.

What’s Expected:

GBP/USD Retail Sales

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Why Is This Event Important:

Prospects for a stronger recovery may prompt an increased number of BoE officials to adopt a more hawkish tone for monetary policy, and we may see Governor Mark Carney continue to prepare U.K. households and businesses for higher borrowing-costs as the central bank turns increasingly upbeat towards the economy. However, with the May election quickly approaching, the Monetary Policy Committee (MPC) may continue to endorse a wait-and-see approach going into mid-2015 amid the risk for a material shift in fiscal policy.

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (FEB)

1.3%

1.2%

Employment Change (3Mo3M) (JAN)

130K

143K

BRC Shop Price Index (YoY) (FEB)

-1.2%

-1.7%

Easing consumer prices paired with the pickup in job growth may encourage a strong rebound in household spending, and a positive development may produce a more meaningful correction in GBP/USD as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Average Weekly Earnings in Bonus (3MoY) (JAN)

2.2%

1.8%

Net Consumer Credit (JAN)

0.9B

0.8B

GfK Consumer Confidence (FEB)

2

1

However, the ongoing weakness in wage growth along with the slowdown in private-sector credit may drag on household spending, and another dismal retail sales report may heighten the bearish sentiment surrounding the sterling as the near-term outlook remains clouded by the May elections.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Retail Sales Expands 0.4% or Greater

  • Need green, five-minute candle following the release to consider a long British Pound trade.
  • If market reaction favors bullish sterling trade, buy GBP/USD with two separate position.
  • Set stop at the near-by swing low/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.

Bearish GBP Trade: Household Spending Disappoints

  • Need red, five-minute candle to favor a short GBP/USD trade.
  • Implement same setup as the bullish British Pound trade, just in opposite direction.

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Potential Price Targets For The Release

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD continue to face range-bound ahead of the May 2015 election as it clouds the fundamental outlook for the U.K. economy, but a break of the bullish RSI momentum raises the risk for fresh-lows in the exchange rate.
  • Interim Resistance: 1.4980 (38.2% retracement) to 1.5015 (50% expansion)
  • Interim Support: 1.4700 pivot to 1.4710 (78.6% 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)

JAN 2015

02/20/2015 9:30 GMT

-0.2%

-0.3%

+12

+16

January 2015 U.K. Retail Sales

GBP/USD Chart

U.K. Retail Sales slipped another 0.3% in February after contracting a revised 0.1% the month prior. The ongoing weakness in private sector-consumption may encourage the Bank of England (BoE) to further delay the normalization cycle as the entire committee now favors a wait-and-see approach, and the British Pound remains at risk of facing additional headwinds over the near-term as the May election clouds the outlook for fiscal policy. The market reaction was short-lived as GBP/USD held its ground throughout the North American trade to end the day at 1.5399.

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

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

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