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GBP/USD Bullish Setup to Gather Pace on Upbeat U.K. Retail Sales

GBP/USD Bullish Setup to Gather Pace on Upbeat U.K. Retail Sales

2015-05-21 04:00:00
David Song, Shuyang Ren,
Share:

- U.K. Household Spending to Rebound in April Following Unexpected Contraction.

- Sales ex Auto Fuel to Expand for Third-Consecutive Month?

Trading the News: U.K. Retail Sales

A pickup in U.K. Retail Sales may prompt a near-term advance in GBP/USD as the Bank of England (BoE) turns increasingly upbeat towards the economy and remains on course to normalize monetary policy.

What’s Expected:

GBP/USD Retail Sales

Click Here for the DailyFX Calendar

Why Is This Event Important:

Signs of a strengthening recovery may put increased pressure on the Monetary Policy Committee (MPC) to normalize monetary policy, and we may see a tighten with the Fed for higher rates as BoE Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs.

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (APR)

1.0%

0.8%

Average Weekly Earning ex. Bonus (3MoY) (MAR)

2.1%

2.2%

BRC Shop Price Index (YoY) (APR)

-1.7%

-1.9%

Discounted prices paired with stronger wage growth may generate a marked expansion in household spending, and a positive development may spark a bullish reaction in the British Pound as it raises the outlook for growth and inflation.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

CBI Reported Sales (APR)

25

12

Gross Domestic Product (YoY) (1Q A)

2.6%

2.4%

CBI Business Optimism (APR)

19

3

However, waning confidence along with the ongoing slacking in the real economy may drag on consumption, and another unexpected decline may spur a near-term selloff in the sterling as market participants push back bets for a BoE rate hike.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. Retail Sales Climbs 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 Consumption Continues to Disappoint

  • 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 may continue to retrace the decline from 2014 as the pair appears to be carving out another higher-low in May; topside targets remain favored as the bullish formation in price & RSI remains in play.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD following the unexpected slowdown in the U.K. CPI, with the ratio currently sitting at +1.15.
  • Interim Resistance: 1.5780 (38.2% retracement) to 1.5814 (May high)
  • Interim Support: 1.5550 (61.8% expansion) 1.5570 (38.2% retracement)

Read More:

USDOLLAR Support in Focus as Fed Says June Hike ‘Unlikely’

EURCAD Pullback Stalls at Support- Sub 1.3538 to Negate Bullish Bias

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)

MAR 2015

04/23/2015 8:30 GMT

0.4%

-0.5%

+6

+47

March 2015 U.K. Retail Sales

GBP/USD Chart

U.K. Retail Sales unexpectedly slipped 0.5% in March after climbing a revised 0.6% the month prior. At the same time, sales excluding auto fuel increased another 0.2% after expanding 0.6% in February. Despite the soft print, it seems as though the Bank of England (BoE) will stay on course to normalize monetary policy as Governor Mark Carney continues to warn of higher borrowing-costs. The initial market reaction in GBP/USD was short-lived as it climbed back above the 1.5000 handle, with the pair closing the day at 1.5034.

--- 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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