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Dismal UK Retail Sales to Spur Another Test of GBP/USD Resilience

Dismal UK Retail Sales to Spur Another Test of GBP/USD Resilience

David Song, Shuyang Ren,

- U.K. Retail Sales Projected to Contract for Fifth Time in Last Ten-Months.

- Will a Slowdown in Private-Sector Consumption Spur an Ongoing 8-1 Split Within the BoE?

Trading the News: U.K. Retail Sales

A 0.6% contraction in U.K. Retail Sales may dampen the appeal of the sterling and threaten the range-bound price action in GBP/USD as market participants push out bets for a Bank of England (BoE) rate-hike.

What’s Expected:

GBP/USD UK Retail Sales

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the BoE largely remains on course to normalize monetary policy, it seems as though Governor Mark Carney remains in no rush to implement higher borrowings costs amid the external risks surrounding the U.K. However, signs of stronger consumption may put increased pressure on the Monetary Policy Committee (MPC) to raise the benchmark interest rate off of the record-low as the real economy gets on a firmer footing.

For more updates, sign up for David's e-mail distribution list.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (OCT)

1.0%

1.1%

Average Weekly Earnings ex. Bonus (3Mo3M) (SEP)

2.6%

2.5%

Jobless Claims Change (OCT)

1.4K

3.3K

Sticky inflation accompanied by subdued wage growth may weigh on household spending, and a marked decline in U.K. Retail Sales may trigger a bearish reaction in the sterling as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

NIESR GDP Estimate (OCT)

--

0.6%

Markit Purchasing Manager Index- Services (OCT)

54.5

54.9

Net Consumer Credit (SEP)

1.1B

1.3B

Nevertheless, signs of a stronger recovery paired with the expansion in private-sector credit may have helped to boost consumption, and a stronger-than-expected sales report may spur a larger rebound in GBP/USD as it raises the BoE’s scope to normalize monetary policy sooner rather than later.

How To Trade This Event Risk(Video)

Bearish GBP Trade: Retail Sales Contracts 0.6% 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.

Bullish GBP Trade: U.K. Household Spending Exceeds Market Forecast

  • 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

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD outlook remains tilted to the downside especially as the BoE remains in no rush to normalize policy, with the pair at risk for a further decline as Relative Strength Index (RSI) largely retains the bearish formation from back in May.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd has flipped net-short GBP/USD for the first time since August 21, with the ratio slipping to -1.06 as 49% of traders are now long.
  • Interim Resistance: 1.5460 (23.6% retracement) to 1.5508 (October high)
  • Interim Support: 1.4860 (78.6% retracement) to 1.4910 (61.8% retracement)

Impact that the 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)

SEP

2015

10/22/2015 8:30 GMT

0.4%

1.7%

+1

-79

September 2015 U.K. Retail Sales

GBP/USD Chart

The headline reading for U.K. Retail Sales unexpectedly showed a 1.9% jump in September to mark the largest advance since November 2014, while sales excluding auto fuel grew 1.7% amid forecasts for a 0.4% print. The pickup in private-sector consumption, one of the leading drivers of growth for the U.K. economy, may encourage the Bank of England (BoE) to stay on course to normalize monetary policy, but it seems as though Governor Mark Carney remains in no rush to implement higher borrowing-costs amid the external risks surrounding the region. The market reaction in the British Pound was short-lived, with GBP/USD pulling back from the 1.5500 handle to end the North American trade at 1.5392.

Read More:

GBP/USD 1.5240 Remains Key to Next Short Term Move

NZD/USD Drops Into September High- Bearish Sub 6588

Price & Time: USD/CAD – It’s Showtime

President Xi Warns That China Faces Considerable Downward Pressure

--- 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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