EUR/USD: Trading the U.S. Advance Retail Sales Report

Wednesday, 11 February 2009 10:48:34 GMT
Written by David Song, Currency Analyst

Retail spending in the U.S. is expected to contract another 0.8% in January as consumers continue to face financial uncertainties paired with a weakening labor market. A report by the Conference Board showed that consumer confidence fell to 37.7 from a revised reading of 38.6 in December, which was the lowest reading since records begin in 1967.

[B][U]Trading the News: U.S. Advance Retail Sales[/U][/B]

[B]What�s Expected[/B]
Time of release: 02/12/2009 13:30 GMT, 08:30 EST
Primary Pair Impact: EURUSD
Expected: -0.8%
Previous: -2.7%

[B][U]Effect the U.S. retail sales report had over EURUSD for the past 2 months[/U][/B]

[U]December 2008 U.S. Retail Sales[/U]

Private spending in the U.S. plunged 2.7% in December, marking its worst string of declines since comparable records began in 1992, and domestic demands are likely to deteriorate further as consumers continue to face a weakening labor market paired with tightening credit conditions. A deeper look into the report showed that sales at gasoline stations slipped another 15.9% after falling 18.3% in the previous month, while discretionary spending on clothing fell 2.5% during the month. The data foreshadows a deepening recession in the economy as private-sector spending, which is one of the biggest drivers of growth, falters, and will certainly weigh on the Obama Administration�s ability to jump-start the world�s largest economy as growths prospects deteriorate at a record pace.

[U]November 2008 U.S. Retail Sales[/U]

Retail sales in the U.S. recorded its worst slump since recordkeeping began in 1992 as demands weakened for the fifth consecutive month. Spending plunged 1.8% during November amid expectations for a 2.0% decline, and conditions are likely to get worse as the labor market deteriorates at a record pace. The breakdown of the report showed that gas sales fell at a record pace during the month as receipts slipped 14.7% from October, while demands for automobiles fell another 2.8% following the 5.5% drop in the previous month. The data continues to reflect a dour outlook for growth as the world�s largest economy faces its longest recession in over a quarter century, and may lead policymakers to increase their efforts over the coming months in order to avoid a deep and prolonged recession.


[B]
What To Look For Before The Release[/B]

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market�s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize:

Click Hereto learn more about how to trade this news event with Active Trader.

[B]How To Trade This Event Risk[/B]

Retail spending in the U.S. is expected to contract another 0.8% in January as consumers continue to face financial uncertainties paired with a weakening labor market. A report by the Conference Board showed that consumer confidence fell to 37.7 from a revised reading of 38.6 in December, which was the lowest reading since records begin in 1967, as businesses continued to cutback on employment. As a result, the world�s largest economy lost another 598K jobs during the same period, which marked the biggest decline since 1974, and raised the annual rate of unemployment to a 17-year high of 7.6% from 7.2% in December. In addition, first-time claims for jobless benefits rose to a 26-year high of 626K in the week ending January 31, and conditions are likely to get worse as the economy faces its worst financial crisis since the Great Depression. Mounting turmoil across the financial spectrum continued to weigh on private-sector lending as consumer credit slipped another $6.6B in December to $2.56T, after falling $11.0B in the previous month, which was the biggest drop since 1943. As the economic downturn in the U.S. accelerates, the International Monetary Fund forecasts the annual rate of growth to contract 1.6% this year, and as the outlook for future growth remains bleak, policy makers are likely to step up their effort in an attempt to jump-start the ailing economy. The U.S. Senate passed a $838B fiscal stimulus plan earlier this week in an effort to stimulate growth in the country however, as hurdles remain to get the legislation written into law, the tedious and cumbersome process will likely prolong the much needed aide to the economy, which could weigh on the greenback as the outlook for growth remains bleak. Nevertheless, the lack of clarity in Treasury Secretary Timothy Geithner bank bailout plan and the mediocre remarks held by Fed Chairman Ben Bernanke failed to restore confidence amongst investors, which sparked a rise in risk aversion across the global market, and as the U.S. dollar continues to benefit from safe haven flows, the reserve currency may strengthen against its currency counterparts as risk sentiment continues to drive price action in the forex market.

A dismal sales report is likely to stoke increased selling pressures for the dollar as signs of a deepening recession emerge, but a less than expected drop in demands paired with a rise in risk aversion could spur a rally for the greenback following the given event risk. Therefore, if the retail sales report crosses the wires better than expected ( a drop of 0.2% or less) paired with an increase in safe-haven flows, we will look for a red, five-minute candle following the enhanced release to confirm a sell entry on two lots of EURUSD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on our discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, mounting job losses paired with financial uncertainties are likely to drag on consumer spending, and a dismal sales reading will continue to foreshadow a deepening recession throughout the economy. As a result, if the sales data falls in line with expectations or slips more than 0.8% during the month, we will hold a bearish outlook for the dollar, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

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