Household spending in the U.K. is expected to improve throughout the second-half of the year, with economists forecasting retail sales to rise 0.4% in July, and the data could drive the British pound higher against its currency counterparts as market participants anticipate the Bank of England to tighten policy over the next 12 months.
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[B][U]Trading the News: U.K. Retail Sales[/U][/B]
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What’s Expected[/U][/B]
Time of release: [B]08/20/2009 09:30 GMT, 04:30 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]
Expected: 0.4%
Previous: 1.2%
[B][U]Effect the [/U][/B]<b><u>U.K. Retail Sales report had over GBPUSD for the past 2 months
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June 2009 [/U][U]U.K.[/U][U] Retail Sales[/U][U][/U]
Retail sales in the U.K. jumped 1.2% in June, topping expectations for a 0.3% rise, and the data reinforces an improved outlook for future growth as policymakers take unprecedented steps to stimulate the ailing economy. The breakdown of the report showed discretionary spending on clothing and footwear surged 4.7% from May, while food store sales increased for the fourth consecutive month in June, and the pickup in private spending may lead the Bank of England to hold a neutral policy stance going forward as the outlook for growth and inflation improves. However, as the central bank anticipates the labor market to weaken further and sees a risk of a slower recovery, policymakers may continue to ease policy further over the coming months in an effort to support a sustainable recovery.
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May 2009 [/U][U]U.K. Retail Sales[/U]
Consumer spending in the U.K. unexpectedly slipped 0.6% in May, with the annual rate of consumption falling 1.6% from the previous year, and the data reinforces a dour outlook for growth and inflation as households face a weakening labor market paired with fears of a protracted downturn. A deeper look at the report showed discretionary spending on clothing and footwear slumped 1.9% from April, with sales at non-specialized stores falling 1.8%, while spending on household goods advanced 1.6% during the month. Meanwhile, the Bank of England continued to see a risk of a slower recovery as credit conditions remain far from normal, with Governor Mervyn King stating that ‘banks’ ability to finance a sustainable recovery remains impaired by low levels of equity capital.’ The comment suggests that the BoE may expand its asset purchase program in the months ahead in an effort to shore up the ailing economy.
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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.
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How To Trade This Event Risk[/B]
Household spending in the U.K. is expected to improve throughout the second-half of the year, with economists forecasting retail sales to rise 0.4% in July, and the data could drive the British pound higher against its currency counterparts as market participants anticipate the Bank of England to tighten policy over the next 12 months. At the same time, the advanced 2Q GDP reading reinforced a weakening outlook for the region as the growth rate plunged at annual pace of 5.6% from the previous year to mark the biggest decline since recordkeeping began in 1955, and the slump in the labor market paired with tightening credit conditions may to weigh on economic activity going forward as businesses continue to scale back on production and employment in an effort to weather the downturn in global trade. Moreover, a report by the Bank of England showed home equity withdrawals fell at a record pace during the first quarter, while consumer credit unexpectedly slipped to 0.1B from a revised reading of 0.2B in May, and the data foreshadows a dour outlook for personal consumption, which is one of the biggest drivers of growth, as banks remain reluctant to lend. Nevertheless, a report by the National Institute of Economic and Social Research said economic activity declined at a slower pace during the three-months though July, with the International Monetary Fund raising its 2010 growth forecast to 0.2% from an initial forecast of -0.4%, and the rebound in consumer confidence could support a rise in retail sales as policymakers take unprecedented steps to jump-start the ailing economy. Meanwhile, the Bank of Englandheld the benchmark interest rate at 0.50% earlier this month, but unexpectedly expanded its asset purchase scheme by GBP 50B to GBP175B in order to maintain its 2% target for price growth however, the minutes of the policy meeting showed the MPC voted 6-3 to expand the program, with Governor Mervyn King , Timothy Besley and David Miles pushing for a GBP 75B expansion to GBP 200B in an effort to support a sustainable recovery. The statement said that ‘insufficient stimulatory monetary policy’ could hamper the economic outlook as policymakers anticipate the annual rate of inflation to fall below 1.0% this year, and an unexpected drop in retail sales could weigh on the exchange rate as the central bank maintains a dovish policy stance.
Trading the given event risk favors a bullish outlook for Cable as market participants anticipate household spending to increase in July, and price action following the release could set the stage for a long pound-dollar trade. Therefore, if retail sales rises 0.4% or greater from the previous month, we will look for a green, five-minute candle subsequent to the data to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will place our initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will determine our first target. Our second objective will be based on discretion, and we will move the stop to breakeven once the first trade reaches its target in order to preserve our profits.
On the other hand, fading demands for employment paired with tightening credit conditions may lead households to scale back on consumption, and an unexpected drop in personal consumption is likely to drag on the exchange rate as investors weigh the outlook for a sustainable recovery. As a result, if retail sales falls 0.2% or greater in July, we will favor a bearish forecast for Cable, and will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.
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