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GBP/USD Vulnerable to Further Losses on Slowing U.K. Retail Sales

GBP/USD Vulnerable to Further Losses on Slowing U.K. Retail Sales

2016-04-21 04:00:00
David Song, Currency Strategist
Share:

- U.K. Retail Sales to Contract for Second Straight Month in March.

- Will Slower Consumption Prompt the BoE to Adopt a Dovish Outlook for Monetary Policy?

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

Trading the News: U.K. Retail Sales

Another contraction in U.K. Retail Sales may dampen the appeal of the British Pound and drag on GBP/USD as signs of a slowing recovery provides the Bank of England (BoE) with increased scope to retain the record-low interest rate throughout the near to medium-term.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Even though BoE warns that the next policy move will be to normalize monetary policy, the Monetary Policy Committee (MPC) may stick to the sidelines ahead of the U.K. Referendum in June, and the central bank may look to carry its accommodative policy stance into 2017 amid the uncertainty surrounding the economic outlook.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Employment Change (3Mo3M) (FEB)

60K

20K

Consumer Price Index Core (YoY) (MAR)

1.3%

1.5%

BRC Sales Like-for-Like (YoY) (MAR)

2.0%

-0.7%

Slowing job growth accompanied by the pickup in consumer prices may drag on household spending, and a marked decline in retail sales may spark a bearish reaction in the sterling as it weighs on interest-rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Average Hourly Earnings ex. Bonus (3MoY) (FEB)

2.1%

2.2%

Gross Domestic Product (YoY) (4Q F)

1.9%

2.1%

GfK Consumer Confidence (MAR)

-1

0

However, sticky wage growth paired with hopes for a stronger recovery may boost private-sector consumption, and a rebound in retail spending may put increased pressure on the BoE to normalize policy sooner rather than later as Governor Mark Carney sees a risk of overshooting the 2% inflation-target over the policy horizon.

How To Trade This Event Risk(Video)

Bearish GBP Trade: Retail Sales Falls Another 0.3% 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: Household Spending Tops 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 reverse.

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • The bullish formation on the Relative Strength Index (RSI) may highlight a bottoming-process especially as GBP/USD appears to be carving an inverse head-and-shoulders formation from the end of 2015, but the pair may continue to face range-bound prices as the U.K. Referendum clouds the economic outlook for the U.K.
  • Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion)
  • Interim Support: 1.3870 (78.6% expansion) and 1.3960 (50% expansion)

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

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)

FEB

2016

03/24/2016 09:30 GMT

-1.0%

-0.2%

+49

+70

February 2016 U.K. Retail Sales

Please add a description for the image.

U.K. Retail Sales continued to beat market expectations in February, with household spending contracting 0.2% after advancing 2.3% the month prior. A deeper look at the report showed discretionary spending for clothing & footwear slipped 0.4%, while demand for household goods increased another 1.4% after rising 3.3% in January. The initial market reaction was short-lived, with GBP/USD gaining ground during the day to end the session at 1.4147.

Read More:

GBP/USD Technical Analysis: Pound Pops into Confluent Zone; Reversal Afoot?

US DOLLAR Technical Analysis: Retesting 2016 Lows

EUR/USD and USD/CHF Outside Weeks at Well-Defined Levels

Big Test For Spoos, Big Test For the Markets

Get our top trading opportunities of 2016 HERE

--- Written by David Song, Currency Analyst

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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