Trading the News: U.K. Retail Sales

What’s Expected
Time of release: 09/18/2008 08:30 GMT, 04:30 ET
Primary Pair Impact : GBPUSD
Expected: -0.5%
Previous: 0.8%

How To Trade This Event Risk

U.K. retail sales are expected to falter after last month’s unexpected improvement. Market participants anticipate a 0.5% decline in spending as rampant inflation continues sap purchasing power. Consumer price inflation surged to a fresh record high of 4.7% from 4.4% in July, which only suggests that private sector consumption will remain relatively weak as prices continue to rise. Meanwhile, the labor market has weakened considerably as jobless claims surged to a record high of 32.5K from a revised reading of 27.8K in July. The claimant count rate increased as well in August, rising to 2.8% from 2.7%, the ILO unemployment rate ticked higher to 5.5% from 5.4% in June. The U.K. labor market has clearly deteriorated throughout the year, and strengthens the argument that retail sales will falter as the economy is on the brink of a recession. Furthermore, the BoE Minutes for the September 4th meeting showed that the MPC voted 8-1 in to hold the benchmark interest rate steady at 5.00%, with David Blanchflower voting for a 50bp rate cut. Meanwhile, Tim Besley did not vote for a rate hike this time around, which suggests that the central bank has softened their hawkish bias. As the BoE shifts their focus to the downside growth risks for the economy, a fall in retail spending could lead the bank to lower the benchmark interest rate ahead of schedule.

A surprising rebound in retail spending could fuel bullish sentiment for the British pound as it holds against significant support levels, and may lead the central bank to hold a neutral policy stance going forward. Therefore, we will look for a green, five-minute candle to confirm an entry on two lots of GBPUSD. We will setup our initial stop at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be purely based on discretion, and we will move the stop on the second lot to break even when the first half of the trade reaches its target in order to preserve our profits.

On the other hand, fading growth prospects paired with an acceleration in unemployment suggests that consumers will cutback on spending as they face higher living costs. A fall in private-sector consumption would trigger a short trade for the GBP/USD, and we will follow the same strategy as the long position listed above, just in reverse.

Jamie Saettele is a Technical Currency Analyst for FXCM.