UK Retail Sales (MoM) (SEP) (8:30 GMT; 4:30 ET)
Expected: 0.1%
Previous: 0.6%

UK Retail Sales (YoY) (SEP) (8:30 GMT; 4:30 ET)
Expected: 5.5%
Previous: 4.9%

How Will The Markets React?

Retail spending in the UK is anticipated to slow during the month of September to 0.1 percent, down from 0.6 percent the month prior, though it would mark the fifth consecutive period of positive growth. Furthermore, the annualized rate is estimated to have picked up to a nearly three-year high of 5.5 percent. The data would be in line with the British Retail Consortium’s (BRC) September survey, which indicated that colder weather and aggressive discounting help boost sales numbers, despite a credit crunch and news of a bank run on Northern Rock. However, it may only be a matter of time before the UK consumer will cut back on discretionary spending, especially as the effects of the Bank of England’s tightening cycle earlier in the year starts to come into play. Sales of durable goods such as washing machines, which tend to be financed with credit, have already started to become more tepid. Nevertheless, with average earnings unexpectedly accelerating in August, growing incomes could help keep consumption levels, and economic expansion as a whole in the UK, relatively healthy.

Bonds – Long Gilts

Gilts have pushed to new intraday highs, and while resistance looms just above, the contracts look likely to continue higher. The head and shoulders pattern on the daily charts has been ignored as price has not followed through for a break of the neckline, but it will take a break above the 106.70 level for the picture to look truly bullish. The release of UK retail sales could exacerbate gains for Gilts, as the data could potentially be weaker-than-expected. However, if the consumption figure actually improves significantly, Gilts could ease back towards 106.22 as expansion in the UK shows few signs of slowing.

FX – GBP/USD

The GBP/USD pair has done nothing but consolidate gains over the past two weeks, forming a flag formation on the daily charts and signaling the potential for a break higher. However, the release of UK retail sales on Thursday could spark a break lower, as the figure is anticipated to show that consumption growth slowed during the month of September. However, if traders keep a more watchful eye on the annualized reading, which is anticipated to jump to a nearly three-year high, the news could actually lead Cable to trek higher. Nevertheless, with traders feeling particularly jittery about the outlook for monetary policy by the Bank of England after the minutes of their most recent meeting showed that über-dove Blanchflower voted for a rate cut, a disappointing retail sales report may have a greater impact on the British pound. If this happens to be the case, GBP/USD may push down to target the confluence of the 100 SMA and Fibonacci support 2.0161/90.

Equities – FTSE 100

The FTSE 100 did an about-face at the 7-year highs near the 6,750 level on Monday and Tuesday; however, after bouncing from short-term trendline support, the index has targeted those highs once again. With stocks on Wall Street taking a beating this week, it is worth wondering if equities are finally taking a turn for the worst for at least the near-term. If UK retail sales prove to be much weaker-than-expected, the news may lead the FTSE 100 to sell off towards Fibonacci support at 6,532 as the data would signal that economic expansion may be in the process of slowing quite a bit, given the Bank of England’s stringent policy actions earlier in the year. On the other hand, solid performances in other global stock markets along with resilient consumption figures would allow the FTSE 100 to rally further.

Terri Belkas is a Currency Strategist at FXCM.