March 20 UK Retail Sales (MoM) (FEB) (09:30 GMT; 05:30 EST)
Expected: -0.2%
Previous: 0.8%

UK Retail Sales (YoY) (FEB) (09:30 GMT; 05:30 EST)
Expected: 3.6%
Previous: 5.6%

What Are The Markets Facing?

Retail spending in the UK is anticipated to slow during the month of February and fall 0.2 percent from January to help drag the annual rate of growth down to 3.6 percent. The data would be in line with the British Retail Consortium’s (BRC) February survey, which indicated that consumers tightened their purse strings and led same-store sales to rise a tepid 1.5 percent from last year. While labor market conditions remain rather resilient, wage growth has not been as strong as expected. In January, average earnings (excluding bonus) went unchanged at a 3.7 percent annualized pace. Meanwhile, UK consumer sentiment is souring as they grapple 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 members David Blanchflower and John Gieve both voted for a 25bp cut in March as “financial markets had taken a further turn for the worse and stressed conditions were expected to last for longer.” On the other hand, the majority of MPC members voted for no change in rates, as they were concerned that “back-to-back reductions might lead observers to think that the Committee was focusing on downside risks to demand at the expense of the medium-term outlook for inflation.” Nevertheless, CPI was anticipated “to return to target in the medium term,” and with a growing number of MPC members becoming more dovish, a softer-than-expected UK retail sales report will only lead the markets to raise speculation that the BOE will cut rates in April.

Bonds – Long Gilt Futures

Gilts have remained within a rising channel as liquidity concerns have sent funds flowing into safe havens. The contract ran into resistance at 112.00 when the recent Bear Stearns collapse reignited fears that a systematic US banking failure would reverberate throughout global markets. Nevertheless, another test of that level may be in store if weak UK retail sales raise the probabilities that the BOE will cut rates in April. On the other hand, a surprisingly strong spending report will likely weigh the contract down towards 111.50.

FX – GBP/USD

The British pound has taken a heavy hit in recent days against the US dollar, as the latter has finally started to regain a bid tone. However, the release of the minutes from the Bank of England’s March MPC meeting – which revealed two votes to cut rates by 25bps – weighed even more on the GBP/USD pair to take it below the psychologically important 2.00 level. Indeed, given the major downside risks to growth in the UK economy, the BOE MPC is likely to be more open to considering cutting rates in April. If Thursday’s release of UK retail sales reiterates that sentiment, GBP/USD could continue to ease back towards the confluence of the 50 SMA and the 61.8 percent retracement level of 1.9361 – 2.0397 at 1.9760, or perhaps break even lower to target 1.9610. On the other hand, a surprisingly strong reading may help to prop the pair higher, especially as interest rate differentials are still greatly in favor of GBP/USD long positions.

Equities – FTSE 100 Index

While the FTSE 100 did bounce quite a bit from Monday’s low near 5,414, the index’s failure to break above resistance at 5,610 suggests that UK equity market bulls may be few and far between. Indeed, investors remain leery of risky assets like stocks and carry trades, as evidenced by the pick up in the VIX Index on Wednesday after it plunged on Tuesday. Upcoming UK event risk may bode ill for the FTSE 100 as well on Thursday, as February retail sales growth is forecasted to slow. Furthermore, if traders remain risk averse, the index may return down to the 5,400 level.

Terri Belkas is a Currency Strategist at FXCM.