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

Trading the News: U.K. Retail Sales

What’s Expected:

Time of release: 10/20/2011 8:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: 0.2%

Previous: -0.1%

DailyFX Forecast: -0.1% to 0.4%

Why Is This Event Important:

Retail spending in the U.K. is expected to increase 0.2% in September and the rebound in household consumption is likely to spark a bullish reaction in the British Pound as it instills an improved outlook for future growth. The pickup in private sector activity may encourage the Bank of England to ramp up its fundamental assessment of the real economy, and the central bank may adopt a wait-and-see approach for the remainder of the year after expanding the asset purchase program to GBP 275B. However, the MPC may preserve a dovish tone for monetary policy given the slowing recovery in Britain, and the committee may keep the door open to expand monetary policy further as it sees an increased risk of undershooting the 2% target for inflation.

Recent Economic Developments

The Upside

The Downside

The rebound in household sentiment paired with the expansion in consumer credit bodes well for retail sales, and a rise in spending may lead the GBP/USD to breakout of its current range as growth prospects improve. However, the stickiness in consumer prices paired with stagnant wage growth may push Britons to scale back on spending, and a dismal sales report is likely to weigh on the exchange rate as the fundamental outlook for the U.K. deteriorates. In turn, the GBP/USD may struggle to holds its ground over the next 24-hours of trading, and the exchange rate may threaten the rebound from 1.5273 as market participants increase bets for additional monetary support.

Potential Price Targets For The Release

How To Trade This Event Risk

A rebound in household spending is likely to prop up the sterling as it encourage an improved outlook for future growth, and the market reaction could set the stage for long British Pound trade as it dampens the prospects for additional monetary easing. Therefore, if consumption increases by 0.2% or greater in September, we will need to see a green, five-minute candle subsequent to the release to establish a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first target. The second objective 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 an effort to protect our winnings.

In contrast, the slowdown in wage growth paired with heightening price pressures may impede on private sector consumption, and a drop in retail sales is likely to bear down on the exchange rate as it raises the risk of a double-dip recession. As a result, if spending holds flat or unexpectedly contracts from the previous month, we will carry out the same setup for a short pound-dollar trade as the long position laid out above, just in reverse.

Impact that U.K. Retail Sales has had on GBP during the last month

August 2011 U.K. Retail Sales

Retail spending in the U.K. slipped 0.2% in August, while sales excluding auto fuel fell 0.1% during the same period after expanding 0.2% in the previous month. The breakdown of the report showed a 1.1% decline in gasoline receipts paired with a 0.2% drop in demands for household goods, while discretionary spending on clothing and footwear increased 0.5% in August after falling 0.1% in the month prior. As private sector activity wanes, the Bank of England may keep the door open to expand monetary policy further, and the central bank looks poised to carry its easing cycle into the following year as the slowing recovery in the U.K. dampens the outlook for growth and inflation. The better-than-expected print sparked a bullish reaction in the British Pound, with the GBP/USD climbing back above 1.5800, and the sterling held higher throughout the North American trade as the exchange rate closed at 1.5797 at the end of the day.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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