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Trading the News: U.S. Advance Retail Sales

What's Expected:

Time of release: 02/13/2012 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 0.1%

Previous: 0.5%

DailyFX Forecast: 0.1% to 0.5%

Why Is This Event Important:

U.S. retail sales are projected to increase 0.1% in January following the 0.5% expansion the month prior and the slowdown in private sector consumption may dampen the appeal of the dollar as it instills a weakened outlook for growth. As the Federal Reserve a 'qualitative approach' for monetary policy, a slowdown in household spending may fuel speculation for more quantitative easing, but we may see the FOMC gradually move away from its easing cycle as the central bank anticipates a stronger recovery this year.

Recent Economic Developments

The Upside

Release
Expected
Actual
Consumer Credit (DEC)
$14.000B
$14.595B
Personal Income (DEC)
0.8%
2.6%
Durable Goods Orders (DEC)
2.0%
4.6%
The Downside

Release
Expected
Actual
Factory Orders (DEC)
2.3%
1.8%
Change in Non-Farm Payrolls (JAN)
165K
157K
Consumer Confidence (JAN)
64.0
58.6
The ongoing expansion in private sector credit along with the uptick in personal income certainly bodes well for household consumption, and a stronger-than-expected sales report should prop up the dollar as it dampens the Fed's scope to expand the balance sheet further. However, the recent lull in household sentiment paired with the protracted recovery in the labor market may prompt a marked slowdown in retail spending, and a weak print may drag on the reserve currency as it fuels bets for more easing.

Potential Price Targets For The Release

As the relative strength index on the EURUSD fails to maintain the upward trend dating back to November, we may see the pair struggle to climb back above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, and the pullback from the yearly high (1.3709) may produce a move back towards the 38.2% Fib (1.3120) should the ascending channel give way. However, a dismal U.S. retail sales report may spark a more meaningful rebound in the exchange rate as it stokes speculation for more easing, and we may see the bullish trend in the EURUSD continue to take shape as the Fed maintains a highly accommodative policy stance.

How To Trade This Event Risk

Expectations for a slower rate of consumption instills a bearish outlook for the greenback, but a positive development may pave the way for a long U.S. dollar trade should the report dampen expectations for more QE. Therefore, if retail sales tops market forecast, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in an effort to lock-in our gains.

On the other hand, the drop in household confidence along with the ongoing weakness in the labor market may drag on private sector consumption, and a dismal print may trigger a selloff in the reserve currency as it raises the scope for additional monetary support. As a result, if sales increases 0.1% or unexpectedly contracts from the previous month, we will carry out the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Advance Retail Sales report has had on USD during the last month

Period
Data Released
Estimate
Actual
Pips Change
(1 Hour post event )
Pips Change
(End of Day post event)
DEC 2012
1/15/2013 13:30 GMT
0.2%
0.5%
+14
-15
December 2012 U.S. Advance Retail Sales

Forex_EURUSD-_Trading_the_U.S._Advance_Retail_Sales_Report_body_ScreenShot256.png, EUR/USD- Trading the U.S. Advance Retail Sales Report Retail spending increased another 0.5% in December, led by a 1.6% rise in demands for motor vehicle and parts, while gasoline receipts tumbled another 1.6% after contracting 4.5% in November. Despite the better-than-expected print, the dollar struggled to hold its ground following the print, with the EURUSD climbing above the 1.3350 figure, but the market reaction failed to gather momentum during the North American trade as the pair closed at 1.3304.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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