Trading the News: US Retail Sales

Time of release: 05/13/2008 12:30 GMT, 08:30 EST
Primary Pair Impact : EUR/USD
Expected: -0.2%
Previous: 0.2%

How To Trade This Event Risk

U.S retail sales are expected to have declined 0.2% in April as a housing slump and rising inflation have squeezed consumers wallets. Oil has settled above $120/bbl, which has seen the national average for a gallon of gas reach $3.613, leaving consumers with less to spend on discretionary goods. The squeeze from rising prices and a loss of wealth from the housing slump has sunk confidence to a 26 year low of 62.6, according to the U of M survey. There seems no end to the housing slump with prices falling another 12.7% in February, according to the S&P/ Case Schiller House Price Index. The picture isn’t expected to get brighter for consumers going forward with the economy losing another 20,00 jobs after three consecutive months of job losses toping 70,000 and personal income slowing to 0.3% in March from 0.5% the month prior. Nevertheless, traders are feeling more confident, as the worse of the credit crisis is expected to have passed leaving normal business cycle issues. The more traditional problems of inflation and slow growth are ones traders have a better grasp of gauging and therefore are increasing their risk appetite. The dollar has benefitted from this restored confidence as expectations increase that the Fed has ended their easing policy and growth will resume at the latest in early 2009.

Despite the woes of the U.S. consumer, March saw retail sales and personal spending increase. April also saw many Americans get the first distributions of the fiscal stimulus plan, as over 7.7 million received electronic transfers. Consumers expecting a $110 billion in cash, may have accelerated their spending in April and possibly ending the month on a strong note. Several discount retailers have already reported a pick up in traffic, and if the increase in volume can offset the lower prices paid, it may boost the bottom number. Considering current bullish dollar momentum and the recent run of better than expected U.S. fundamental data, any gain in sales would lend itself to a long trade. With a confirmed, strong release we will look for a five-minute red candle to confirm entry on two lots of EURUSD. Our initial stop will be set at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind to rising support levels in the area) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.

Alternatively, rising oil prices are expected to continue weighing on consumers going forward. If consumers are showing signs of faltering, future growth forecasts will be significantly reduced. Since, current momentum resides with dollar bulls, we would need a decline of -0.4% in purchases for a short trade. We will follow the same strategy long as the short above, just in reverse.

Antonio Sousa is a Currency Analyst for FXCM.