UK Retail Sales (MoM) (JAN) (09:30 GMT; 05:30 EST)
Expected: 0.3%
Previous: -0.4%

UK Retail Sales (YoY) (JAN) (09:30 GMT; 05:30 EST)
Expected: 4.7%
Previous: 2.7%

What Are The Markets Facing?

Retail spending in the UK is anticipated to recover during the month of January and improve 0.3 percent to help push the annual rate of growth up to a four-month high of 4.7 percent. The data would be in line with the British Retail Consortium’s (BRC) January survey, which indicated that heavy discounting led same-store sales to rebound 2.6 percent from last year. Furthermore, labor market conditions remain extremely resilient, and average earnings in December (excluding bonus) rose 3.7 percent from a year earlier. On the other hand, UK consumers are grappling with higher food and energy prices, which may be sapping disposable income and suggests that the headline retail sales report could be a bit weaker than forecasts. Moreover, there are worries that tighter credit market conditions and weak global growth prospects for 2008 will severely impair the UK economy, as Bank of England Monetary Policy Committee member David Blanchflower voted for a 50bp cut in February as he saw a risk of a “very sharp slowdown. Indeed, the minutes of the BOE’s February meeting revealed that the rest of the MPC was concerned about softer consumption as well, but given upside inflation risks, the majority voted in favor of a 25bp cut to 5.25 percent. The bank’s Quarterly Inflation Report, which was released last week, reflected a similar sentiment and indicates that the MPC’s bias remains a dovish one. Nevertheless, another rate cut may not be in store for March and if UK retail sales prove to be better-than-expected, the markets may be more aggressive in pricing this in.

Bonds – Long Gilt Futures

Gilts have eased the pressure with a small bounce off the 108.92 low, but nevertheless, the downtrend remains as technicals may be set up for a complete retrace of the December and January rally. Upcoming UK data may underpin the case for such a move from a fundamental standpoint, as January retail sales figures are forecasted to reflect a recovery. Though the downside risks to growth in the UK loom large, upside inflation risks will likely prevent the BOE from cutting rates again in March, and optimistic consumption reports will help to highlight this. The next major level of support looms at 108.50, though disappointing retail sales along with a bounce from trendline support could lead Gilts to rally towards 109.25.

FX – GBP/USD

After the British pound sold off ahead of the February 7 rate cut by the Bank of England, the bank’s subsequent hawkish tone led the pair to rebound as high as 1.9736. However, in recent days, the nationalization of Northern Rock and the release of the BOE MPC’s February meeting minutes sent the pair tumbling toward the 1.9400 support level. Nevertheless, commentary from the rest of the committee reaffirmed their overall hawkish tone, despite a vote for a 50bp cut by MPC member Blanchflower. Looking ahead, UK retail sales are expected to rebound 0.3 percent, which will help to curb fears of a sharp economic slowdown. Although the improvement in retail sales is likely to come from severe discounting, a stronger than expected print could help the pair to rally towards 1.9950. On the other hand, disappointing retail sales growth will stoke concerns of an economic slowdown, and could push the pair down to target the January 22 low of 1.9338.

Equities – FTSE 100 Index

UK equities have slowly climbed from the lows established on January 22, but solid resistance at the 6,025 level has prevented any major rallies from breaking higher. Indeed, the daily charts of the FTSE 100 shows the index consolidating within an ascending triangle, which tends to have bullish implications when a breakout occurs. On the other hand, a break below trendline support near 5,800 would suggest that more bearish price action could be on the way. Upcoming UK event risk may bode well for the FTSE 100 on Thursday, as January retail sales are anticipated to improve. However, the main driver of global equity markets remains risk aversion, and with corporate writedown concerns still an issue, the breakout could ultimately be to the downside.

Terri Belkas is a Currency Strategist at FXCM.