U.K. Retail Sales on Tap - Will the British Pound Fall Further?

U.K. retail sales are anticipated to fall 0.7% in September despite the unexpected improvement in the previous month. In fact, increased prices pressures continues to sap purchasing power as the consumer price index surged to 5.2% from 4.7% in August, and remains well above the Bank of England’s 3% limit.

Trading the News: U.K. Retail Sales 

What’s Expected
Time of release:                  10/23/2008 08:00 GMT, 04:00 EST
Primary Pair Impact :          GBPUSD
Expected:                              -0.7%
Previous:                               1.2%

Impact of U.K. Retail Sales on GBPUSD over the last 3 months

August U.K. Retail Sales

U.K. retail sales rose for the second consecutive month despite expectations for a 0.5% decline. Consumer spending increased 1.2% in August following a 0.9% gain in the previous month as firms commenced in heavy discounting to draw potential customers. On an annual basis, private-sector consumption increased to 3.3% from a revised reading of 2.0%, but the data is somewhat misleading as Europe’s second largest economy teeters on the brink of a recession. Economic activity in the U.K. stalled during the second quarter, and market participants expect negative growth for the next two quarters as growth prospects deteriorate amid fading demands from the global economy.

  coordsize="21600,21600" o:spt="75" o:preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe"
filled="f" stroked="f">

















height:169.5pt'>
o:title="ScreenShot001" />

July U.K. Retail Sales

Retail spending in the U.K. unexpectedly rebounded in July, rising to 0.8% from a record low reading of -4.3% in June. The breakdown of the report showed that discretionary spending on household and discounted goods improved, while department store sales slipped 2.6% from the previous month. Despite the surprising improvement, the BoE stated that the economy will face a ‘difficult and painful adjustment’ as rampant inflation continues to sap purchasing power for consumers. The repercussion effects of the ongoing credit crunch and the housing meltdown only adds to the argument that personal consumption will falter over the coming months.

id="_x0000_t75" coordsize="21600,21600" o:spt="75" o:preferrelative="t"
path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f">

















height:174.75pt'>
o:title="ScreenShot003" />

June U.K. Retail Sales

Consumer consumption in the U.K. plunged to a multi-decade low of -3.9% from a record high of 3.6% in May. Consumers facing a weakening economy are also seeing their purchasing power diminish as inflation has risen to 4.4% . Indeed, non-food stores saw a 4.5% decline in sales while apparel purchases dropped 6.9%. The decline in domestic growth will keep the BoE from raising rates as they try to get inflation back to their 2% target. Consumer prices have been above the central bank’s 3% threshold for the past three months. Bearish price action following the dour fundamentals would have triggered a short trade, but a lack of follow through led to a 50 point loss.

coordsize="21600,21600" o:spt="75" o:preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe"
filled="f" stroked="f">

















height:168.75pt'>
o:title="ScreenShot002" />

How To Trade This Event Risk

U.K. retail sales are anticipated to fall 0.7% in September despite the unexpected improvement in the previous month. In fact, increased prices pressures continues to sap purchasing power as the consumer price index surged to 5.2% from 4.7% in August, and remains well above the Bank of England’s 3% limit. Furthermore, higher living costs paired with the economic slowdown have pushed firms to cutback on employment as  jobless claims rose for eight consecutive months this year to reach a two year high of 939,900, and led the unemployment rate to reach 5.7% in August, which is the highest level since 2000. Meanwhile, the central bank Governor Mervyn King stated that a recession ‘seems likely’ as economic activity stalled in the second quarter, and sent the British pound to a five-year low of 1.6201 against the U.S. dollar. In addition, the BoE Minutes of the October 8th rate decision showed that the MPC voted unanimously to lower the benchmark interest rate to 4.50% from 5.00%, stating that the economy has ‘deteriorated substantially.’ The committee went onto say that upside price risks have ‘shifted decisively to the downside,’ which suggests that the central bank may ease policy further as Europe’s second largest economy slips into a recession, which would only drag on the pound going forward.

The unexpected rebound in July and August has certainly raised speculation that retail sales may cross the wires better than expected, which could help to increase the appeal of the British pound. As a result, an improve reading would favor a long GBPUSD trade, and we will look for a green, five-minute candle following the release to confirm an entry on two lots of the pound-dollar. We will place our initial stop order at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, an inline print would only add to growth concerns for the U.K., which could stoke increased selling pressures for the Sterling. Therefore, a decline in consumer spending would favor a short trade for the GBPUSD, and we will follow the same setup as the long trade stated above, just in reverse.