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EUR/USD: Trading the German Retail Sales

Thu, Jan 8 2009, 07:40 GMT
by Daily FX Research Team

FXCM

The euro could strengthen against its currency counterparts throughout the following session as economists expect retail spending in Germany to increase 0.5% in November on the back of falling oil prices.

Trading the News: German Retail Sales

What’s Expected

Time of release: 01/05/2009 07:00 GMT, 02:00 EST

Primary Pair Impact : EURUSD

Expected: 0.5%

Previous: -1.6%

Effect the German Retail Sales had over EURUSD for the past 3 months

October 2008 German Retail Sales

Private-sector spending in Germany dropped another 1.6% in October despite expectations for a 0.5% gain, and conditions are likely to get worse over the coming months as Europe’s largest economy faces its worse recession in over a decade.
Economic activity contracted 0.5% in the third quarter, and the growth outlook remains bleak as Bundesbank President Axel Weber expects the economy to weaken further in the fourth quarter. Meanwhile, prices pressures in Germany fell at a record pace during the second half of the year as the headline reading for inflation slipped to 1.5% from 2.5% in October, and the upside risks for inflation is likely to weaken further over the remainder of the year as oil prices continue to fall further. As a result, the ECB is widely expected to hold a dovish outlook going forward, and may ease policy further over the coming months in order to stave off a severe downturn in the economy.

September 2008 German Retail Sales

Retail sales in Germany plunged 2.3% in September as financial uncertainties pair with mounting growth concerns pushed consumers to cutback on spending. Fading demands from home and abroad have certainly dragged on the economy throughout the second half of the year, and conditions are likely to get worse as Europe’s largest economy heads into a recession. As a result, German policymakers lowered their outlook for growth as they expect the economy to expand 0.2% next year, which could lead the European Central Bank to lower the benchmark interest rate further over the coming months as price pressures alleviate. The ECB, joined the Fed on October 8th in a coordinated rate cut and lowered borrowing costs for the first time since 2003 as they anticipate price pressures to weaken further, and the central bank is likely to ease policy further over the coming months as the upside risks for inflation diminish.

August 2008 German Retail Sales

Falling energy costs spurred increased spending in Germany as retail sales rose 3.1% in August to record its biggest monthly gain since December 2006. Despite the better-than-expected release, the growth outlook for Europe’s largest economy remains bleak as financial uncertainties linger. The economic downturn paired with instability in the global financial market are likely to weigh on growth going forward, and economic activity is expected to weaken further throughout the second half of the year as demands from the global economy deteriorate. Meanwhile, alleviating price pressures paired with mounting growth concerns may lead the European Central Bank to lower borrowing costs over the coming months in order to avoid a severe downturn in the economy, and may hold a dovish outlook going forward as global commodity prices continue to fall lower.

How To Trade This Event Risk

The euro could strengthen against its currency counterparts throughout the following session as economists expect retail spending in Germany to increase 0.5% in November on the back of falling oil prices. Lower energy costs have certainly helped consumers and businesses to weather the significant downturn in the economy, but the economic outlook for Europe’s largest economy remains bleak as the Bundesbank expected economic activity to contact 0.8% in 2009. The economic docket showed that factory orders plunged 6.1% in October, which was followed by an 8.3% contraction in the previous month, while business confidence slipped to its lowest level since recordkeeping began in 1991. Fading demands from home and abroad paired with instability in the global financial market have dragged on growth throughout the second half of 2008, and conditions are likely to get worse as the economy faces its worst recession since 1993.
Meanwhile, deteriorating fundamentals have helped to taper the upside risks for inflation as the consumer price index slipped to an annual rate of 1.1% from 1.4% in November, and price pressures are expected to weaken further over the coming months as economic growth deteriorates at a rapid pace. Nevertheless, as the European Central Bank carries out its one and only mandate to ensure price stability, policymakers may ease policy further this month as the risks for deflation intensify. However, hawkish commentary by ECB President Trichet suggests that central bank may hold rates steady at the January 15th policy meeting, but could be forced to lower borrowing costs throughout the first half of the New Year in order to meet the 2% target for inflation.

Despite the dour outlook for growth, the unemployment rate remains at a 16 year low of 7.5%, and the resilience in the labor market could help to bolster a rise in private-sector spending. As market participants anticipate retail sales to improve, an increase of 0.4% or more would set the stage for a long EURUSD trade, and with our expectations at hand, we will look for a green, five-minute candle following the release to confirm an entry on two lots of the euro-dollar. We will place our initial stop at the nearby swing low (or reasonable distance), and this level of risk will determine the target for the first lot. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, financial uncertainties paired with the economic downturn is likely to weigh on consumers as Europe’s largest economy faces its worse recession in over a decade, and a dismal sales reading would certainly stoke increased selling pressures for the euro as growth prospects deteriorate further. As a result, a contraction of 0.5% or more in retail sales would favor a short EURUSD trade following the release, and we will follow the same setup as the long trade mentioned above, just in reverse.

Published on  Thu, Jan 8 2009, 07:40 GMT