MAY 22
UK Retail Sales (MoM) (APR) (08:30 GMT; 04:30 EST)
Expected: -0.5%
Previous: -0.4%

UK Retail Sales (YoY) (APR) (08:30 GMT; 04:30 EST)
Expected: 4.2 %
Previous: 4.6%

What Are The Markets Facing?

Retail spending in the UK is anticipated to slow for the second consecutive month during April and fall 0.5 percent from March to help drag the annual rate of growth down to 4.2 percent. The data would be in line with the British Retail Consortium’s (BRC) April survey, which indicated that consumers tightened their purse strings and led same-store sales to tumble 1.5 percent from last year. Furthermore, labor market conditions have started to deteriorate as jobless claims have risen during the past three months, suggesting that consumption growth may have peaked long ago. 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 the UK economy is bound to slow sharply, as the minutes from the Bank of England’s May meeting showed that some Monetary Policy Committee members thought “there was a significant risk that the impact of weakening property markets on the rest of the economy could be more substantial than implied by the central projection. The contraction of credit supply had been intensifying and, coupled with the erosion of real incomes, was likely to depress demand.” On the other hand, the majority of MPC members voted for no change in rates, as they believed that “the economy had shown considerable resilience in the face of variation in credit conditions…It was possible that spending would also be little affected by the current pressures on banks’ balance sheets.” Furthermore, with CPI already at 3 percent and expected rise further in the near term, even a softer-than-expected UK retail sales report may not be enough to raise speculation that the BOE will indeed cut rates in June.

Bonds – Long Gilt Futures

Gilts have fallen in recent weeks to consolidate within a falling wedge, which is typically a bullish formation. Near-term support rests at the 61.8 percent fib of 102.90 - 112.57 at 106.59. The release of UK retail sales could lead Gilts to bounce back above 107, especially if the figures are particularly disappointing. On the other hand, a surprisingly strong spending report will likely weigh the contract down to the previously mention fib level, as the markets bet that the Bank of England will leave rates steady in June.

FX – GBP/USD

The GBP/USD pair continues to consolidate within a wide range, but with recent COT data showing the British pound at bearish extremes, the pair may have formed a short-term bottom and could ultimately push above immediate resistance at 1.9750 toward the 2.00 level. However, if Thursday’s release of UK retail sales proves to be disappointing, GBP/USD could pull back to hold within its recent channel formation. On the other hand, a surprisingly strong reading may help to prop the pair higher, especially given the recent COT data.

Equities – FTSE 100 Index

The FTSE 100’s consolidation within a rising wedge is likely to resolve soon with a bearish break below near-term, critical support at the confluence of a rising trendline and the 200 SMA at 6,175/90. Upcoming UK event risk may bode ill for the FTSE 100 on Thursday, as retail sales growth is forecasted to contract. Furthermore, if traders become increasingly risk averse, the index may tumble below support to target 6,000. On the other hand, a surprisingly strong UK retail sales report could buoy the index, as bulls fight to keep the recent rally alive.

Terri Belkas is a Currency Strategist at FXCM.