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Trading News Report

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

Thu, Nov 20 2008, 08:20 GMT
by Daily FX Research Team

DailyFX

Private-sector consumption in the U.K. is expected to weaken for the second consecutive month in October as economist forecast retail sales to fall another 0.9% following the 0.4% decline in the previous month. Fears of a severe economic downturn has intensified as Great Britain heads into a recession for the first time since 1991.

Trading the News: U.K. Retail Sales

What’s Expected

Time of release: 11/20/2008 09:30 GMT, 04:30 EST

Primary Pair Impact : GBPUSD

Expected: -0.9%

Previous: -0.4%

Impact of U.K. Retail Sales on GBPUSD over the last 3 months

September 2008 U.K. Retail Sales

Retail sales in the U.K. fell 0.4% in September as consumers continue to face higher living costs paired with fading demands for employment. The breakdown of the report showed that spending on household goods fell 2.0%, while discretionary spending on clothing and footwear plunged 2.3% from the previous month. The downturn in Europe’s second largest economy has stoked fears that economic activity will deteriorate further as the U.K. heads into a recession, which could lead the Bank of England to ease policy further over the coming months as growth prospects turn increasingly bleak. The MPC is widely expected to lower the benchmark interest rate at their next policy meeting in November, and may continue to lower borrowing costs well into the next year as fears of a global meltdown intensify.

August 2008 U.K. Retail Sales

U.K. retail sales rose for the second consecutive month despite expectations for a 0.5% decline. Consumer spending increased 1.2% in August following a 0.9% gain in the previous month as firms commenced in heavy discounting to draw potential customers. On an annual basis, private-sector consumption increased to 3.3% from a revised reading of 2.0%, but the data is somewhat misleading as Europe’s second largest economy teeters on the brink of a recession.
Economic activity in the U.K. stalled during the second quarter, and market participants expect negative growth for the next two quarters as growth prospects deteriorate amid fading demands from the global economy.

July 2008 U.K. Retail Sales

Retail spending in the U.K. unexpectedly rebounded in July, rising to 0.8% from a record low reading of -4.3% in June. The breakdown of the report showed that discretionary spending on household and discounted goods improved, while department store sales slipped 2.6% from the previous month. Despite the surprising improvement, the BoE stated that the economy will face a ‘difficult and painful adjustment’ as rampant inflation continues to sap purchasing power for consumers. The repercussion effects of the ongoing credit crunch and the housing meltdown only adds to the argument that personal consumption will falter over the coming months.

How To Trade This Event Risk

Private-sector consumption in the U.K. is expected to weaken for the second consecutive month in October as economist forecast retail sales to fall another 0.9% following the 0.4% decline in the previous month. Fears of a severe economic downturn has intensified as Great Britain heads into a recession for the first time since 1991, and conditions may only get worse going into the next year as growth prospects deteriorate at a record pace. The BRC retail sales survey showed that private-sector spending fell for the first time in three years, while same-store sales plunged 2.2% from the previous month, which suggests that consumers may continue to curb spending as growth fears intensify. Meanwhile, jobless claims in October rose at its fastest pace in 16 years as applications surged 36.5K to 980.9K, followed by a 0.1% rise in the unemployment rate to 5.8%. Fading employment opportunities paired with falling home prices have certainly taken a toll on consumers, and the Bank of England may look to lower borrowing costs even further in order to avoid a deep and prolonged recession. The BoE Minutes from the November 6th policy meeting showed that the MPC voted unanimously to lower the benchmark interest rate by 150bp to 3.00% from 4.50% to stave off further downturns in the economy, and noted that a ‘very significant reduction in the bank rate’ is needed in order to meet the bank’s 2% target for inflation. The policymakers went onto to say that they may lower borrowing costs by more than 200bp over the foreseeable future, which suggests that the economy is slowing at a faster pace than the bank had initially expected. The comments from the BoE paired with the dour outlook could weaken the British pound further over the coming months as investors expect the MPC to ease policy further, and buying pressures for the Sterling may remain subdued over the near-term as investors continue to limit their appetite for risk.

Despite the significant downturn in the economy, easing price pressures in the U.K. could spur a rebound in sales as living costs become more affordable. The headline reading for inflation fell to 4.5% from 5.2% in September to record its biggest decline in 11 years, followed by a 0.3% in the core measure for inflation, and may help to boost spending going forward as prices continue to fall lower. Therefore, an unexpected rise in retail spending would set the stage for a long GBPUSD position, and a green, five-minute candle following the release will confirm an entry on two lots of the pound-dollar. Our initial stop order will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. 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, mounting growth fears paired with falling home prices could push consumers to cutback on spending further, which could only stoke increased selling pressures for the British pound. As a result, a 0.9% decline or greater in retail sales would favor a short GBPUSD trade, and we will follow the same strategy as the long trade mentioned above, just in reverse.

Published on  Thu, Nov 20 2008, 08:26 GMT