GBP/USD Risks Further Losses on Slowing U.K. Retail Sales
- U.K. Retail Sales to Contract for First Time Since December.
- Will Slower Consumption Encourage the BoE to Further Delay Normalizing Monetary Policy?
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Trading the News: U.K. Retail Sales
The U.K. Retail Sales report may produce headwinds for the British Pound and drag on GBP/USD as signs of a slowing recovery provides the Bank of England (BoE) with greater scope to further delay its normalization cycle.
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Why Is This Event Important:
Even though BoE argues that the next policy move will be to lift the benchmark interest rate off of the record-low, the Monetary Policy Committee (MPC) may preserve its current policy throughout 2016 in an effort to mitigate the downside risks surrounding the real economy.
Expectations: Bearish Argument/Scenario
|CBI Trends Total Orders (MAR)||-14||-14|
|NIESR GDP Estimate (FEB)||--||0.3%|
|GfK Consumer Confidence (FEB)||3||0|
The recent weakness in household sentiment accompanied by the slowdown in economic activity may drag on private-sector consumption, and a dismal sales report may spur a bearish reaction in GBP/USD as market participants push out bets for a BoE rate-hike.
Risk: Bullish Argument/Scenario
|Jobless Claims Change (FEB)||-9.1K||-18.0K|
|Average Hourly Earnings ex. Bonus (3MoY) (JAN)||2.1%||2.2%|
|Net Consumer Credit (JAN)||1.4B||1.6B|
Nevertheless, the expansion in private-sector lending paired with the ongoing improvement in labor-market dynamics may boost household spending, and a positive development may generate a near-term rebound in GBP/USD as it puts pressure on Governor Mark Carney and Co. to normalize monetary policy sooner rather than later.
How To Trade This Event Risk(Video)
Bearish GBP Trade: Retail Sales Slips 1.0% or Greater
- Need red, five-minute candle following the GDP report to consider a short British Pound trade.
- If market reaction favors bearish sterling trade, 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: U.K. Consumption Beats Market Expectations
- Need green, five-minute candle to favor a long GBP/USD trade.
- Implement same setup as the bearish British Pound trade, just in reverse.
Potential Price Targets For The Release
Chart - Created Using FXCM Marketscope 2.0
- Longer-term outlook for GBP/USD remains tilted to the downside as the BoE continues to endorse a wait-and-see approach in 2016, and the pair may continue to carve a series of lower highs & lows over the near to medium-term should the Relative Strength Index (RSI) fail to retain the bullish formation carried over from earlier this year.
- Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion)
- Interim Support: 1.3870 (78.6% expansion) and 1.4000 pivot
Check out the short-term technical levels that matter for GBP/JPY heading into the report!
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Impact that the U.K. Retail Sales Report has had on GBP during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|02/19/2016 09:30 GMT||0.7%||2.3%||-8||+78|
January 2016 U.K. Retail Sales
U.K. Retail Sales beat market expectations in January, with household spending increasing 2.3% after contracting a revised 1.3% in December. A deeper look at the report showed a meaningful rebound in discretionary spending, with sales at non-food stores increasing 3.6%, while spending on clothing & footwear advanced 3.3% during the same period. Despite the better-than-expected print, it seems as though the Bank of England (BoE) will stick to its current policy throughout the first-half of 2016 as the U.K. referendum clouds the economic outlook for the region. Nevertheless, there was a limited market reaction to the data print as GBP/USD dipped below the 1.4300 handle during the European trade, but the sterling regained its footing during the North American session to end the day at 1.4399.
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--- Written by David Song, Currency Analyst and Shuyang Ren
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