EUR/USD: Trading the German Retail Sales

Retail sales in Germany is expected to increase 0.5% in April as easing price pressures drive up consumer spending power, and a rise in private consumption is likely to encourage an improved outlook for future growth as Bundesbank President Axel Weber sees ‘some grounds’ for an economic recovery later this year.

[U][B]Trading the News: German Retail Sales[/B][/U][B]

[U]What’s Expected[/U]
Time of release: 05/29/2009 06:00 GMT, 02:00 EST
Primary Pair Impact : EURUSD[/B]
Expected: 0.5%
Previous: -1.0%
[U]
[B]Impact the German Retail Sales has had on EURUSD over the last 2 months[/B][/U]

                                             [B]Period[/B]

                                   [B]Data Released[/B]

                                   [B]Estimate[/B]

                                   [B]Actual[/B]

                                   [B]Pips Change[/B]

         [B](1 Hour post event )[/B]

                                   [B]Pips Change[/B]

         [B](End of Day post event)[/B]

                                                     Mar 2009

                                   05/04/2009  06:00 GMT

                                   0.2%

                                   [B]-1.0%[/B]

                                   +6

                                   +99

                                                     Feb 2009

                                   04/01/2009  06:00 GMT

                                   0.3%

                                   [B]-0.2%[/B]

                                   +7

                                   +36

[U]
March 2009 German Retail Sales[/U]

                                     German retail sales unexpectedly fell 1.0% in March to mark the third consecutive monthly decline, and conditions are likely to get worse as households face a weakening labor market. A deeper look into the report showed auto purchases plunged 6.5% from the previous month, with demands for clothing and shoes falling 4.4%, while discretionary spending on food and tobacco increased 1.8%. As a result, Bundesbank President Axel Weber said economic activity is likely to remain subdued throughout the year, and expects a tepid recover in 2010 as the outlook for growth and inflation remains bleak. As a result, the European Central Bank widely expected to ease policy further later this month, and is likely to cut the benchmark interest rate by another 25bp to a record low of 1.00% in an effort to soften the landing of the economy.

[U]
February 2009 German Retail Sales[/U]

                                     Household spending in Germany unexpectedly fell for the second consecutive month in February, and growth prospects are likely to deteriorate further this year as the Europe’s largest economy faces its worst recession in over half a century. Retail sales slipped 0.2% during the month, following the 0.9% from January, and the breakdown of the report showed that spending on food and tobacco slipped another 0.5%, while demands for information technology plunged 2.5% from the previous month. The data reinforces a weakening outlook for the region as private-sector consumption continues to falter, and conditions are likely to get worse as households face a weakening labor market paired with tightening credit conditions. Meanwhile, after lowering the overnight lending rate by 25bp to 1.00% in March, the ECB is expected to ease policy further this week as the growth prospects continue to deteriorate.

                         [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, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

                                      [B][U]Bullish   Scenario:[/U][/B]

         [B][U][/U][/B]

         If   we see substantially deeper available liquidity on the Bid side of the   market, this tells us that major price providers in the market are looking to   buy the Euro against the US Dollar. Considering that close to 60% of all FX   market volume is cleared through just six top banks, we see it prudent to be   on the same side of the trade as major institutions and will favor a bullish   bias on EURUSD ahead of the data release.

                                   [B][U]Bearish   Scenario:[/U][/B]
         
         If we see substantially deeper available liquidity on the Offer side of the   market, this tells us that major price providers in the market are looking to   sell the Euro against the US Dollar. Considering that close to 60% of all FX   market volume is cleared through just six top banks, we see it prudent to be   on the same side of the trade as major institutions and will favor a bearish   bias on EURUSD ahead of the data release.

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

Retail sales in Germany is expected to increase 0.5% in April as easing price pressures drive up consumer spending power, and a rise in private consumption is likely to encourage an improved outlook for future growth as Bundesbank President Axel Weber sees ‘some grounds’ for an economic recovery later this year. However, the release may fail to meet expectations for the fourth consecutive month as households face a weakening labor market paired with fears of a deepening downturn, and an unexpected drop in sales could weigh on the exchange rate as the region faces its worst recession in over half a century. The final GDP reading for Europe’s largest economy showed economic activity fell 3.8% in the first quarter, driven by a record drop in business investments and exports, and firms may continue to scale back on production and employment as they face fading demands from home and abroad. Moreover, the Bloomberg retail PMI reading for May showed household spending contracted for the 12th consecutive month in May, which reinforced a weakening outlook for the release at hand, and data suggests conditions are likely to get worse as the government anticipates economic activity to contract 6% this year. Nevertheless, a report by the Federal Labor Agency showed unemployment increased 1K to 3.46M in May, which was well below expectations for rise of 64K, while business sentiment increased for the second consecutive month during the same period, and the European Central Bank is likely to take further steps to restore economic confidence as they maintain a dovish outlook for future policy. Earlier this week, council member Erkki Liikane argued against putting a floor on the interest rate, stating the central bank did not decide ‘that the new interest rate level would be the lowest possible regardless of future situations.’ At the same time, ECB Vice-President Lucas Papademos, along with board member Ewald Nowotny said economic activity is likely to remain very weak this year, and expect growth to stay low in 2010, while Mr. Weber anticipates an recovery next year, and the comments suggests that the central bank may continue to ease policy further throughout the year as the outlook for growth and inflation falter. As investors weigh the outlook for future policy, expectations for further easing is likely to weigh on the exchange rate however, as market sentiment improves, increased demands for high-yielding assets may continue to drive the euro higher as market participants raise their appetite for risk.

Expectations for a rise in German retail sales favors a bullish outlook for the single-currency, and price action following the release could set the stage for a long euro-dollar trade. Therefore, an in-line print or a rise of more than 0.5% would lead us to look for a green, five-minute candle subsequent to the release to confirm a buy entry on two-lots of EUR/USD. 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 discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

On the other hand, household spending unexpectedly fell during the past three releases, and a dismal sales report is likely to weigh on the exchange rate as fears of a deepening downturn intensify. As a result, a drop of 0.2% or more would lead us to hold a bearish outlook for the single-currency, and we will use the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.