GBP/USD: Trading the U.K. Retail Sales Report

The British pound may continue to push higher this week as economists forecast retail sales to increased 0.5% in April however, as households face a weakening labor market paired with fears of a deepening recession, an unexpected drop in private consumption could weigh on the exchange rate as the region faces its worst economic downturn in over half a century.

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

[B][/B]

[B][U]What’s Expected[/U][/B]

Time of release: [B]05/21/2009 09:30 GMT, 04:30 EST[/B]

Primary Pair Impact[B] : GBPUSD[/B]

Expected: 0.5%

Previous: 0.3%

[B][/B]

[B][U]Effect the U.K. Retail Sales report had over GBPUSD for the past 2 months[/U][/B]

                                     [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 2008

                                   04/24/2009   09:30 GMT

                                   -0.3%

                                   [B]0.3%[/B]

                                   -8

                                   +60

                                                     Feb 2008

                                   03/26/2008   09:30 GMT

                                   -0.4%

                                   [B]-1.9%[/B]

                                   -47

                                   -148

[U]March 2008 [/U][U]U.K.[/U][U] Retail Sales[/U]

                                     Private   consumption in the U.K. unexpectedly increased 0.3% in March, which pushed   the annualized reading to 1.5% from 0.4% in the previous month. A deeper look   into the report showed discretionary spending on clothing and footwear   increased 1.5% from the previous month, followed by a 0.6% rise in food store   sales, while demands for households goods dropped 2.0% during the month. The   data suggests households are turning less pessimistic towards the economy as   policymakers take unprecedented steps to shore up the isle nation however,   conditions are likely to get worse as the region faces its worst economic   downturn in over half a century. As a result, the Bank of England increased   its asset purchase program by GBP 50B to a total of GBP125B earlier this   month, and may utilize the remaining GBP 25B in the second half of the year   as growth and inflation falter.

[U]February 2008 U.K. Retail Sales[/U]

                                     U.K.   retail sales plunged 1.9% in February amid expectations for a 0.4%, while   domestic demands increased 0.4% from the previous year to mark the smallest   gain since September 1995, and the outlook for private spending remains bleak   as households face a weakening labor market. The breakdown of the report   showed sales of clothing and footwear plunged 3.7% during the month, followed   by a 0.3% drop in food sales, while purchases of household goods slipped 1.9%   from the previous month. The bigger than expected drop in private spending   continues to reinforce a weakening outlook for region, and growth prospects   are likely to deteriorate further this year as businesses continue to scale   back on production and employment in an effort to weather the first global   recession since World War II. As a result policymakers may take further steps   to shore up the economy, and the Bank of England is likely to hold a dovish   policy stance over the medium term as price pressures falter.

                         [B]

What To Look For Before The Release[/B][B][/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 Pound 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 GBPUSD 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 Pound 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 GBPUSD ahead of the data release.

                         [B]

How To Trade This Event Risk[/B]

The British pound may continue to push higher this week as economists forecast retail sales to increased 0.5% in April however, as households face a weakening labor market paired with fears of a deepening recession, an unexpected drop in private consumption could weigh on the exchange rate as the region faces its worst economic downturn in over half a century. The advanced 1Q GDP reading for the U.K. reinforced a weakening outlook for the region as the growth rate contracted at its fastest pace since 1979, and economic conditions are likely to deteriorate further throughout the year as businesses continue to scale back on production and employment in an effort to weather the first global recession since World War II. A report by the National Statistics office showed unemployment increased 244K in the three months through March to 2.22M based on the International Labour Organization’s technique, which is the highest level since 1996, while jobless claims increased another 57.1K in April , with the claimant count rate rising to an eleven year high of 4.7% from 4.5% in the previous month. Moreover, service-based activity, which accounts for more than two-thirds of the economy, fell another 1.2% in the three-months through February following the record drop in the previous month, and the data reinforces a dour outlook for growth and inflation as economic activity falters. As a result, the National Institute of Economic and Social Research lowered the 2009 growth forecast and expects GDP to contract 4.3% this year, while the Organization for Economic Cooperation and Development said that ‘further fiscal measures’ could be warranted after lowering their projections for the U.K. at the end of March. Meanwhile, the Bank of England held the benchmark interest rate at the record-low of 0.50% earlier this month in an effort to stimulate the ailing economy, and expanded its asset purchase program by GBP 50B to a total of GBP125B as the MPC anticipates price growth to fall below the 2% target later this year. Deteriorating fundamentals paired with the downturn in global trade continues to foreshadow a deepening downturn in the region, and fundamental headwinds are likely to weigh on the exchange rate as growth and inflation falter but nevertheless, as risk trends continue to dictate price action in the currency market, increased demands for higher risk/reward investments may continue to push the British pound higher against the greenback as market sentiment improves.

Expectations for a rise in retail sales favors a bullish outlook for the British pound, and the uptick in consumer confidence during the previous month suggests that households are turning less pessimistic towards the economy as policymakers take unprecedented steps to stimulate the ailing economy. Therefore, an in-line print or a rise of more than 0.3% would set the stage for a long Sterling trade, and we will look for a green, five-minute candle subsequent to the release to confirm a sell entry on two lots of GBP/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, falling home prices paired with the downturn in the labor market could lead households to curb spending, and an unexpected drop in retail sales is likely to weigh on the exchange rate as the outlook for growth and inflation falter. As a result, a drop of 0.2% or more would lead us to favor a bearish outlook for Sterling, and we will follow the same setup for a short pound-dollar trade as the long position mentioned above, just in reverse.