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

Trading the News: U.S. Advance Retail Sales

What’s Expected:

Time of release: 08/12/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 0.5%

Previous: 0.1%

DailyFX Forecast: 0.1% to 0.5%

Why Is This Event Important:

Retail sales in the world’s largest economy is projected to increase another 0.5% in July and the faster pace of expansion could spark a bullish reaction in the greenback as private sector consumption remains one of the leading drivers of growth. As household spending gathers pace, the FOMC may abandon its discouraging outlook for region, and the central bank may carry its current policy into the following year given the split within the committee. However, as Fed Chairman Ben Bernanke warns of a slowing recovery, the central bank head may show an increased willingness to expand monetary policy further, and speculation for another round on quantitative easing could sap demands for the greenback as interest rate expectations falter. Although, trading the sales report may not pan out as expected given the strong correlation with risk, and market sentiment could heavily influence the market reaction as risk trends dictate price action for the major currencies.

Recent Economic Developments

The Upside

The Downside

The marked rise in consumer credit paired with the rebound in household sentiment could spur a larger-than-expected expansion in sales, and a positive development could spur increased demands for the reserve currency as growth prospects improve. However, the slowdown in wage growth along with the fading demands for large-ticket items suggests we will continue to see private sector activity cool throughout the remainder of the year, and the Fed may step up its efforts to stimulate the economy in an effort to encourage a sustainable recovery. Should the data fall short of market expectations, the FOMC may look to expand its balance sheet further, and speculation for QE3 could sap demands for the reserve currency as the central bank highlights a growing risk of a double-dip recession.

Potential Price Targets For The Release

How To Trade This Event Risk

Projections for another monthly advance encourage a bullish outlook for the greenback and the market reaction following the release could set the stage for a long U.S. dollar trade as growth prospects improve. In turn, should the report show retail spending increasing 0.5% or more from the previous month, we will need a red, five-minute candle subsequent to the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, households may curb their willingness to spending in light of the slowing recovery, and the uncertainties surrounding the economy may continue to sap domestic demands as the Fed maintains a cautious outlook for the region. As a result, if sales expands less than 0.4% or unexpectedly contracts from the previous month, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Retail Sales report has had on USD during the last month

June 2011 U.S. Advance Retail Sales

Household spending in the world’s largest economy increased 0.1% in June amid forecasts for a 0.1% decline, while sales less autos held flat for the first time since July 2010. The breakdown of the report showed discretionary spending on clothing increased 0.7%, with demands for building material advancing 1.3%, while gasoline receipts slipped 1.3% on the back of higher energy prices. The softer pace of consumption certainly dampens the outlook for the region as private sector spending remains one of the leading drivers of growth, and the Federal Reserve may see scope to carry its zero interest rate policy into the following year as the US faces a slowing recovery. The initial reaction to the report was certainly short-lived as the EUR/USD work its way well above 1.4200, but we saw the greenback regain its footing during the North American trade, with the exchange rate ending the day at 1.4141.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com